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Economy
Inflation
March WPI inflation: Inflation bugbear refuses to go away. March headline WPI
surprised at 8.98%, up from 8.31% for February. Importantly, this is higher than RBI’s
own expectations of 8.00% as indicated in the March mid-quarter review. Even more
unnerving was the upward revision in January WPI to 9.35% from the provisional
estimate of 8.23%. The inflation dynamics for FY2012E is now looking even more
adverse than our earlier understanding, even as the government continues to dither on
increasing prices of administered fuel products. A significant portion of inflation in India
is also being determined by global factors such as high global cotton prices on the
primary side and high commodity prices on the manufactured side. It is increasingly
becoming a tough task for the RBI to manage inflationary pressures, particularly as it is
also starting to get worried on the growth dynamics.
Food inflation eases but non-food primary articles is a concern
Primary articles inflation was softer in March at 12.96% from 14.79% in February. Most of this
correction was on the back of primary food articles, driven by lower vegetables and milk inflation.
However, inflation levels for cereals were higher in March at 3.96% from 1.89%. The main worry
for the primary articles inflation now appears to be from the non-food side (at 25.88% for March).
The non-food primary articles inflation has been led by sharp increases in the inflation for fibers –
up at 83.85% in March from 72.46% in February (42.28% in October 2010). Globally, cotton
prices have remained firm with tight supplies. USDA had recently revised the world output
estimates lower to 114.5 mn bales from 115 mn bales with a decline in production figures in US,
Turkey, Pakistan and Burkina Faso. However, world consumption estimates were revised up from
116.6 mn bales to 117.1 mn bales. Raw cotton prices are only expected to come down much later
in 2011 after current high prices lead to an increase in cotton acreage in the new crop season.
Manufactured products inflation surprises higher
Manufactured products prices increased by 6.21% compared to 4.94% in February, as all the subindices
rose over the month. ‘Cotton textiles’ and ‘Man-made textile’ registered inflation readings
of 27.45% and 11.35%, respectively. Further, ‘Basic metals alloys and metal products’ inflation
was at 9.31% for March, in line with the higher commodity prices globally. The core inflation,
measured by manufacturing ex-food rose to 7.01% against 6.09% in February, indicating that
demand side pressures in the economy remain strong.
Tough call for RBI – 25 bps increase likely on May 3
Monetary policy stance of the RBI would continue to tilt in favor of managing inflationary
expectations. The 22nd Round of the RBI’s ‘Inflation Expectations Survey of Households’ indicated a
worsening of inflationary expectations with proportion of respondents expecting price increases
more than the current rate increasing to 74.3% from 72.2% in the 21st Round. Consequent to the
large upward surprises, we have changed our inflation expectations for FY2012E. For April we see
Headline WPI inflation moderating to 8.1%, but purely on favorable base effect. Headline WPI
inflation is now likely to be sticky in the range of 8.25-8.50% till around November 2011,
dropping thereafter with expectations of a good monsoon bringing in a healthy Kharif output.
Headline WPI inflation likely to average at around 8.0% in FY2012E, but this assumes no change
in domestic fuel prices. Despite a worsening inflation dynamics, we expect RBI to increase policy
interest rate by 75 bps in FY2012E with the first increase of 25 bps on May 3. The RBI had been
indicating some concerns on growth, especially on the back of a weakening investment cycle,
indicated also by a (-)18.4% capital goods production number for February.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Inflation
March WPI inflation: Inflation bugbear refuses to go away. March headline WPI
surprised at 8.98%, up from 8.31% for February. Importantly, this is higher than RBI’s
own expectations of 8.00% as indicated in the March mid-quarter review. Even more
unnerving was the upward revision in January WPI to 9.35% from the provisional
estimate of 8.23%. The inflation dynamics for FY2012E is now looking even more
adverse than our earlier understanding, even as the government continues to dither on
increasing prices of administered fuel products. A significant portion of inflation in India
is also being determined by global factors such as high global cotton prices on the
primary side and high commodity prices on the manufactured side. It is increasingly
becoming a tough task for the RBI to manage inflationary pressures, particularly as it is
also starting to get worried on the growth dynamics.
Food inflation eases but non-food primary articles is a concern
Primary articles inflation was softer in March at 12.96% from 14.79% in February. Most of this
correction was on the back of primary food articles, driven by lower vegetables and milk inflation.
However, inflation levels for cereals were higher in March at 3.96% from 1.89%. The main worry
for the primary articles inflation now appears to be from the non-food side (at 25.88% for March).
The non-food primary articles inflation has been led by sharp increases in the inflation for fibers –
up at 83.85% in March from 72.46% in February (42.28% in October 2010). Globally, cotton
prices have remained firm with tight supplies. USDA had recently revised the world output
estimates lower to 114.5 mn bales from 115 mn bales with a decline in production figures in US,
Turkey, Pakistan and Burkina Faso. However, world consumption estimates were revised up from
116.6 mn bales to 117.1 mn bales. Raw cotton prices are only expected to come down much later
in 2011 after current high prices lead to an increase in cotton acreage in the new crop season.
Manufactured products inflation surprises higher
Manufactured products prices increased by 6.21% compared to 4.94% in February, as all the subindices
rose over the month. ‘Cotton textiles’ and ‘Man-made textile’ registered inflation readings
of 27.45% and 11.35%, respectively. Further, ‘Basic metals alloys and metal products’ inflation
was at 9.31% for March, in line with the higher commodity prices globally. The core inflation,
measured by manufacturing ex-food rose to 7.01% against 6.09% in February, indicating that
demand side pressures in the economy remain strong.
Tough call for RBI – 25 bps increase likely on May 3
Monetary policy stance of the RBI would continue to tilt in favor of managing inflationary
expectations. The 22nd Round of the RBI’s ‘Inflation Expectations Survey of Households’ indicated a
worsening of inflationary expectations with proportion of respondents expecting price increases
more than the current rate increasing to 74.3% from 72.2% in the 21st Round. Consequent to the
large upward surprises, we have changed our inflation expectations for FY2012E. For April we see
Headline WPI inflation moderating to 8.1%, but purely on favorable base effect. Headline WPI
inflation is now likely to be sticky in the range of 8.25-8.50% till around November 2011,
dropping thereafter with expectations of a good monsoon bringing in a healthy Kharif output.
Headline WPI inflation likely to average at around 8.0% in FY2012E, but this assumes no change
in domestic fuel prices. Despite a worsening inflation dynamics, we expect RBI to increase policy
interest rate by 75 bps in FY2012E with the first increase of 25 bps on May 3. The RBI had been
indicating some concerns on growth, especially on the back of a weakening investment cycle,
indicated also by a (-)18.4% capital goods production number for February.
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