WPI inflation (Jun): Downside surprise unlikely to stop RBI from hiking:: Credit suisse

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● WPI inflation moved up from 9.1% YoY in May to 9.4% in June,
which was actually less than what the consensus expected
(consensus and CS estimate 9.7%).
● Large upward revisions (April was revised up from 8.7% to 9.7%)
mean that ‘true’ June inflation could very well be above 10%. RBI
is unlikely to be letting its guard down in such a scenario.
● What about the weakish industrial production number for May
earlier this week? Could RBI pause in response to that? We think
not.
● We expect a total of 50 bp in rate hikes at the next two policy
meetings (including 25 bp on 26 July). Risks to this are a bit to
the upside, in our view.
WPI inflation moved up from 9.1% YoY in May to 9.4% in
June, which was less than what the consensus expected
Consensus and CS estimate 9.7%: In month-on-month sa* terms, the
WPI was up 0.5% in June (0.4% on average in the previous three
months). Both food and fuel year-on-year inflation moved up in June.
On the brighter side ‘manufactured ex. food’ WPI inflation, considered
as a ‘core’ WPI by the RBI, budged marginally lower to a 7.2% YoY
pace in June from 7.3% in May. In month-on-month terms, prices of all
three broad groups, i.e., food, fuel and the RBI’s ‘core’, moved up. The
fact that the rise in the ‘core’ index (manufactures ex. food) came off a
bit is mainly a lagged reflection of the softening in global commodity
prices in May (remember, even the ‘core’ is heavily influenced by
moves in global metal, chemical prices etc and doesn’t represent
domestic demand pressures as well as a ‘core CPI’ measure does).
Large upward revisions (April was revised up from 8.7% to
9.7%) mean that ‘true’ June inflation could very well be
above 10%
RBI is unlikely to be letting its guard down in such a scenario. In fact,
even if the magnitude of upward revisions gets smaller with time,
readings of WPI inflation are likely to remain at 9% YoY or above for
the next several months. It is only from December that large
favourable base effects come into  play to bring down year-on-year
inflation. RBI might breathe a small sigh of relief at what looks like a
moderation in the monthly rise in the ‘core’ WPI measure – but its
probably too early for the central bank to let its guard down  – (1) there
could again be upward revisions to  this ‘core’ measure and (2) the
year-on-year reading is over 7% which, in its latest policy statement,
the RBI judged as being “much above its medium-term trend of 4.0 %
YoY”.
What about the weakish industrial production number for
May earlier this week? Could RBI pause in response to that?
We think not
In our view, the following sentences in the RBI’s most recent policy
statement suggest that the central bank is willing to accept some
moderation in growth in an attempt to control inflation: “Going forward,
notwithstanding both signs of moderation in commodity prices and
some deceleration in growth,  domestic inflation risks remain
high.  Against this backdrop, the monetary policy stance remains
firmly anti-inflationary, recognising that, in the current circumstances,
some short-run deceleration in growth may be unavoidable in bringing
inflation under control.” (Underlined emphasis is our own).
We expect a total of 50 bp in rate hikes at the next two
policy meetings (including 25 bp on 26 July).
Risks to this are a bit to the upside, in our view. As preservation of
growth eventually gains priority, we expect the RBI to switch to easing
mode in the next financial year (which begins April 2012) where we
have got 75 bp of cuts pencilled in right now.