JPMorgan:: India: inflation stays uncomfortably high in April

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India: inflation stays uncomfortably high in April

Inflation prints at 8.7 % oya in April despite benefiting from a high base effect from the previous year February inflation revised up a whopping 120 bps to 9.5 % from an initial print of 8.3% Food inflation moderates again but global commodity prices cause energy and non-food primary article inflation to accelerate further Monthly momentum of non-food manufacturing (core) inflation abates after two consecutive surges, but core is still running in double digits on a sequential basis Petrol prices finally hiked by 8% and administered prices of other petroleum products expected to be increased over the next week While the impact of the petrol price hike on inflation is expected to be limited (8-9 bps), the impact of a commensurate hike in diesel prices on inflation will be far more material April inflation stays uncomfortably high Inflation continued to remain uncomfortably high in April printing at 8.7 % oya, in line with our expectations but higher than that expected by the market (JP Morgan: 8.7 %, Consensus: 8.5 %). Even though the headline print moderated compared to March’s 9% print, it is important to recognize that (i) the April print benefited from a high base effect from the previous year (the headline index rose sharply in April 2010), and (ii) March headline inflation was boosted by a sharp upward revision in coal prices (which are typically adjusted only once or twice a year) that contributed about 30 bps to the headline rate. Furthermore, the year-on-year growth rates seem to be understating the sequential momentum of inflation, with the headline print running in double digits (10.4 % q/q, saar) and likely to be revised up further when the revised March and April numbers are released. More alarmingly, but not unexpectedly, February inflation was revised up a whopping 120 bps, from 8.3 % oya to 9.5%. Large, retrospective upward revisions (80-120 bps) have become a regularity with the release of each month’s data and therefore the revision to February was not surprising. What this suggests, however, is that when the March and April numbers are revised, the final print will likely be closer to 10% than 9%. Food inflation moderates further; other primary articles and energy inflation accelerates Primary food inflation continued its moderating trend, printing at 8.7 % oya from 9.5 % the months before. This was largely expected given that the idiosyncratic shocks that caused food price inflation to spike a few months ago (unseasonal rains, supply disruptions) have been largely reversed. While food inflation can be expected to moderate even further, we expect that it will remain in the 6-7 % range, which it has averaged over the last 5 years for structural reasons. In contrast, non-food primarily article (e.g. raw rubber, raw cotton) inflation continued to accelerate and printed at 27.3 % oya compared to 25.9 % the month before, as global commodity prices continued to stay elevated in April. Similarly, fuel and power inflation accelerated to 13.3 % from 12.9% the month before, even without taking into account the impact of the recent increase in petrol prices and the expected increase in diesel, LPG and kerosene prices (see below). Non-food manufacturing running in double digits on sequential basis even as monthly momentum slows A key rationale underpinning the RBI’s decision to raise rates by 50 bps and adopt a more aggressive monetary stance was the fact that non-food manufacturing (RBI’s proxy for core inflation) had surged for two successive months in February and March. While the monthly momentum of non-food manufacturing prices slowed in April (0.3 % m/m, sa compared to 1.4 % m/m, sa in February) a moderation was largely expected after two consecutive surges. While the year-on-year growth rate of non-food manufacturing moderated to 6.3 % from 7.4 % in March this was, in part, on account of the high base from April 2010 when manufacturing prices surged. On a sequential basis, however, non-food manufacturing is still running in double digits (10.4 % q/q, saar) and will likely be revised up significantly when the revised estimates for March and April inflation are released. Petrol prices hiked by Rs. 5 per liter, diesel and LPG likely to follow Consistent with expectations, the government raised petrol prices by 8 % (Rs. 5 per litre) on the weekend, once the provincial election voting was over and results were revealed. This move was long-overdue since there has been no change in petrol prices from January (even though these pieces are technically “deregulated”) even as crude prices have surged 25 % during that time. Even after this hike, though, the current under-recovery on petrol is still about Rs 3 per litre and media reports suggest that, unless crude prices moderate sharply over the next few weeks, another petrol price hike may be on the cards next month. Given the small weight of petrol in the WPI basket, the impact on headline inflation from the current hike is expected to be only about 8-9 bps (only half of which will be captured in the May print given that the price hike occurred in mid May) More importantly, however, authorities are expected to increase the administered prices of diesel, kerosene and liquefied petroleum gas (LPG) over the next week. These products account for the vast majority of the under-recoveries faced by oil marketing companies and the oil subsidies on the central government budget. This is because the current administered prices of these products are significantly below those warranted by current crude prices. For example, current diesel prices would need to be increased by about 37 % to wipe out the under-recoveries. However, the increase in prices over the next fortnight is expected to be far more muted. Diesel prices, for example, are expected to be hiked by about 10 percent (Rs 4/liter), but the impact on inflation from even such a limited hike will be material. For example, a 10 percent increase in diesel prices will have a 45 bps direct impact on headline inflation and another 25-30 bps second-round impact on the headline rate.