Goldman Sachs: India June WPI: Core lower than expected but inflationary pressures remain

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India’s June WPI inflation came in at 9.4% yoy, lower than the Bloomberg consensus and our expectation of
9.7% yoy. On a sequential basis, headline inflation grew 0.5% mom s.a. from the 0.2% mom s.a. decline in May
(mainly due to the upward revision in April numbers). The April headline number was revised up by 100 bp to 9.7%
yoy from 8.7% yoy, mostly due to a sharp upward revision in primary articles inflation.
Core prices moderated a bit, but pressures on food and fuel remain. Food inflation remained elevated at 8.4%
yoy, while fuel prices were high, still reflecting only one week of the administered price increase (see Government
raises fuel prices—positive move, higher near-term inflation, India Views, June 26, 2011). The Non-food
Manufactured Inflation Index, the Reserve Bank of India’s (RBI) preferred measure of core, was lower than
expectations, at 7.2% yoy and 0.1% mom s.a. against 0.3% mom s.a.in the previous month, showing some signs
of weakening demand.
The lower-than-expected June print on core inflation is the first indication that the pace of pass-through
from food and fuel prices to core may have slowed, as economic activity has weakened. While food and fuel
inflation were known from their weekly prints, the downward surprise on core indicates some moderation in the
ability of producers to pass on higher costs. However, the domestic administered oil price hike on June 24 is yet to
feed through to the system. We expect the July WPI print to be in double digits, and headline inflation to peak in
September, and come off gradually thereafter due to weaker demand and a favorable base. Our WPI inflation
forecast for FY12 remains at 8.6% yoy.
We continue to expect the RBI to hike policy rates by 25 bp in its July 26 meeting, and to have one more
hike beyond that in 2011. While the RBI will likely consider and remark on the lower-than-expected industrial
production print on July 12, and today’s weaker inflation data, along with global growth concerns, we think the level
of inflation and expectations still remain sufficiently elevated for the central bank to not pause at this stage in its
fight against inflation.