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India Economics
Quick Comment: WPI
Inflation Remains High
WPI headline inflation accelerates again and
remains much above RBI’s comfort zone: The
headline inflation rate (Wholesale Price Index – WPI)
accelerated to 9.1% YoY in May compared to 8.7% YoY
in April 2011. The seasonally adjusted WPI index was
up 0.5% MoM in May (vs. -0.2% MoM in April based on
provisional data). The headline inflation in May was
close to our expectation of 8.8-9% YoY, but was higher
than consensus expectations (as per Bloomberg survey)
of 8.74% YoY. Inflation for March 2011 was also revised
upward to 9.68% YoY from the 9.02% YoY reported
previously.
Non-food inflation picks up in May: Non-food inflation
accelerated to 9.4% YoY in May (vs. 9.1% YoY in the
previous month). Moreover, non-food manufactured
inflation (WPI) that the Central Bank monitors
accelerated to 7.3% in May from 6.3% the previous
month. The acceleration in non-food inflation is largely
driven by higher prices of transport equipment, basic
metals, alloys & metal products, cotton yarn textiles &
fabrics, and mineral oil (including increase in gasoline
prices by Rs5/litre or an average of 8.5%, effective
May 14). See Exhibit 4 for the key contributors to this
acceleration in inflation.
Food inflation continues to accelerate: Food inflation
(primary and manufactured) accelerated to 8.2% YoY in
May vs. 7.7% YoY the previous month. While primary
food inflation decelerated marginally to 8.4% YoY in May
from 8.7% YoY in April 2011, manufactured food
inflation picked up to 7.3% YoY in May (vs. 5.7% YoY
earlier).
Inflation remains a challenge: Strong domestic
demand in the context of slow growth in investments
coupled with supply shocks of higher food, oil and other
global commodity prices have ensured that headline
inflation (WPI) has remained above the RBI’s comfort
zone of 5-5.5% for the past 18 months. Headline inflation
averaged 9.4% during this period. The high inflation
expectations have meant a slow rise in bank deposit growth of
16.4% YoY as of May 27, 2011, whereas credit growth
remained high at 21.7% YoY during the same period. We
expect WPI inflation to average around 9% YoY in 2011 unless
global commodity prices pull back meaningfully.
What about policy response and growth outlook? On the
monetary policy front, considering that inflation remains a
challenge and that there are demand-side pressures from
fiscal policy, we expect the Central bank to announce another
25bp hike in the repo rate in the next mid-quarter review of
monetary policy on June 16. However, as we have been
highlighting, we track bank deposit rates as a better measure of
tightening of monetary conditions instead of the policy rates.
With inflation persistently higher than the RBI’s comfort zone,
we expect the deposit rates to remain higher for longer, forcing
banks to accelerate the lending rate hikes – lifting the overall
cost of capital. We expect GDP growth to decelerate to 7.7% in
F2012 (year-end March) from 8.6% estimated in F2011.
However, considering that the cost of capital might stay higher
for longer, we see downside risks to our growth outlook to the
extent of 0.5ppt.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Economics
Quick Comment: WPI
Inflation Remains High
WPI headline inflation accelerates again and
remains much above RBI’s comfort zone: The
headline inflation rate (Wholesale Price Index – WPI)
accelerated to 9.1% YoY in May compared to 8.7% YoY
in April 2011. The seasonally adjusted WPI index was
up 0.5% MoM in May (vs. -0.2% MoM in April based on
provisional data). The headline inflation in May was
close to our expectation of 8.8-9% YoY, but was higher
than consensus expectations (as per Bloomberg survey)
of 8.74% YoY. Inflation for March 2011 was also revised
upward to 9.68% YoY from the 9.02% YoY reported
previously.
Non-food inflation picks up in May: Non-food inflation
accelerated to 9.4% YoY in May (vs. 9.1% YoY in the
previous month). Moreover, non-food manufactured
inflation (WPI) that the Central Bank monitors
accelerated to 7.3% in May from 6.3% the previous
month. The acceleration in non-food inflation is largely
driven by higher prices of transport equipment, basic
metals, alloys & metal products, cotton yarn textiles &
fabrics, and mineral oil (including increase in gasoline
prices by Rs5/litre or an average of 8.5%, effective
May 14). See Exhibit 4 for the key contributors to this
acceleration in inflation.
Food inflation continues to accelerate: Food inflation
(primary and manufactured) accelerated to 8.2% YoY in
May vs. 7.7% YoY the previous month. While primary
food inflation decelerated marginally to 8.4% YoY in May
from 8.7% YoY in April 2011, manufactured food
inflation picked up to 7.3% YoY in May (vs. 5.7% YoY
earlier).
Inflation remains a challenge: Strong domestic
demand in the context of slow growth in investments
coupled with supply shocks of higher food, oil and other
global commodity prices have ensured that headline
inflation (WPI) has remained above the RBI’s comfort
zone of 5-5.5% for the past 18 months. Headline inflation
averaged 9.4% during this period. The high inflation
expectations have meant a slow rise in bank deposit growth of
16.4% YoY as of May 27, 2011, whereas credit growth
remained high at 21.7% YoY during the same period. We
expect WPI inflation to average around 9% YoY in 2011 unless
global commodity prices pull back meaningfully.
What about policy response and growth outlook? On the
monetary policy front, considering that inflation remains a
challenge and that there are demand-side pressures from
fiscal policy, we expect the Central bank to announce another
25bp hike in the repo rate in the next mid-quarter review of
monetary policy on June 16. However, as we have been
highlighting, we track bank deposit rates as a better measure of
tightening of monetary conditions instead of the policy rates.
With inflation persistently higher than the RBI’s comfort zone,
we expect the deposit rates to remain higher for longer, forcing
banks to accelerate the lending rate hikes – lifting the overall
cost of capital. We expect GDP growth to decelerate to 7.7% in
F2012 (year-end March) from 8.6% estimated in F2011.
However, considering that the cost of capital might stay higher
for longer, we see downside risks to our growth outlook to the
extent of 0.5ppt.
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