INDIA INFLATION – Remains worrying despite lower core ::CLSA

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INDIA INFLATION – Remains
worrying despite lower core
India’s WPI inflation in April came in at a stillelevated
8.7% YoY, marginally ahead of
expectations but slightly lower than the March
outcome of 9.1%. However, there was another
massive upward revision. The inflation for February
was revised to 9.5% YoY from 8.3% reported
previously. February is the third straight month of a
significant revision to the preliminary WPI data. If
this continues, the final March WPI inflation will
likely be revised to 9.5-10.0% range. There have
been data revisions to past years as well, some of
which are reportedly due to a “computer glitch”.
Food inflation moved up to 7.6% YoY in April, after
averaging 6.8% in the prior two months. The rise is
due to higher manufactured food products. Nonfood
manufactured goods inflation, a crude proxy
for core inflation, softened to a 4-month low of
6.3% YoY, largely on account of last year’s high
base. It is highly likely that core inflation for April
will be revised up. On a sequential (sa) basis, the
pace of increase in WPI and WPI-core softened in
April but it is difficult to be totally convinced as
data revisions could significantly alter the trajectory.
The 8% hike in petrol prices over the weekend
will add a small 0.1ppt to headline inflation, but
the likely hike in diesel prices will have a bigger
impact. We estimate that a potential hike of
Rs3/litre increase in diesel will have a direct
impact of around 0.4ppt on headline WPI
inflation. The indirect impact could be of a
similar magnitude.
Inflation remains a key worry, and we expect
another 75bp hike in the repo rate to 8.0% later this
calendar year. WPI inflation is expected to remain in
the 8.5-10.5% YoY range for most of this year
before easing to 7.5% by March 2012, but that will
still be above the RBI’s guidance of 6.0%. The
inflation trajectory will be affected by global
commodity prices, the timing and magnitude of the
hike in local fuel prices, and the upcoming monsoon
season. For more details, please refer to Triple-A
India: Recalibration (11 May).