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Economy
Inflation
September inflation: Crawl down the hill from here? We believe that with the
September outturn of 9.72% (in line with consensus expectation of 9.75% and lower
than our expectation of 9.86%), inflation is likely to have peaked out in August-
September. The climb down for inflation is likely to be at a slow pace given the
depreciated currency and the still elevated levels of global commodity prices; headline WPI
inflation is unlikely to come down to RBI’s comfort levels in the near term. However, given
that some of the lead indicators such as PMI and excise collections are now pointing to a
deeper drop in production, the peaking of inflation could provide RBI with the
opportunity to press the pause button on October 25, but with a continued hawkish bias.
Headline inflation continues to remain at ’uncomfortable‘ levels
Inflation for September came in at 9.72% after August outturn of 9.78%. As we had indicated in
our last inflation comment, August was anticipated to have been the peak for headline WPI
inflation. The recent sharp currency depreciation had led us to believe that the peak of inflation
could have been postponed into September. However, this failed to be true. Primary articles
inflation fell to 11.84% from 12.58% in September and down from 15.1% in April. Food articles
inflation, as indicated by the weekly numbers, came in at 9.23% against 9.62% a month ago.
Manufactured products inflation, which forms the bulk of the index, also came in lower at 7.69%
compared to 7.79% in August. A large portion of this softer bias was however countered by the
fuel and power segment that saw a sharp rise in inflation to 14.09% from 12.84% in August. This
was due to an administered price increase in electricity, price hike in petrol in mid-September and
increases in prices of non-administered items such as naptha, bitumen, lubricants, etc.
Internals of manufactured products inflation point to a mixed picture
In line with lower commodity prices, ’basic metals alloys and metal products‘ fell to 10.94% from
11.56% in August. On the other hand, ’chemicals and chemical products‘ and ’machinery and
machinery tools‘ rose to 8.71% and 3.22% from 8.48% and 2.9%, respectively in August. ‘Food
products’ inflation remained unchanged at 9.97% in September. The four components together
account for around 42% of the total WPI. Non-food manufactured products inflation, which is
indicative of the demand pressures in the economy, fell to 7.62% from 7.74% last month. While
September may be a mixed bag in terms of manufactured goods inflation levels, Exhibit 1 shows
that there is a close correlation between the PMI manufacturing sector and the non-food
manufactured goods inflation.
We strongly advocate for a pause from RBI on October 25
Monetary policy needs to be forward looking and there are now clear indications that the peak of
inflation has possibly been attained, albeit the pace of drop in the inflation trajectory could be
slightly muted. Given that the growth is appearing to slow down now at a slightly faster pace than
earlier anticipated (as we have highlighted in our comment on October 12: ’August IIP: Clear signs
of slowdown‘), it is possibly an opportune moment for the RBI to press the pause button now and
allow for the past monetary policy tightening to impact the real sector of the economy. Further,
we expect the non-food manufacturing inflation to come off from here, a clear indication of
demand-side pressures coming off. The external environment has also now turned out to be much
more adverse than earlier anticipated. Thus, we hold on to our expressed view that RBI is unlikely
to hike rates any further on October 25 and is expected to be patient unless a QE3 type of action
provides a big upward jolt to global commodity prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Inflation
September inflation: Crawl down the hill from here? We believe that with the
September outturn of 9.72% (in line with consensus expectation of 9.75% and lower
than our expectation of 9.86%), inflation is likely to have peaked out in August-
September. The climb down for inflation is likely to be at a slow pace given the
depreciated currency and the still elevated levels of global commodity prices; headline WPI
inflation is unlikely to come down to RBI’s comfort levels in the near term. However, given
that some of the lead indicators such as PMI and excise collections are now pointing to a
deeper drop in production, the peaking of inflation could provide RBI with the
opportunity to press the pause button on October 25, but with a continued hawkish bias.
Headline inflation continues to remain at ’uncomfortable‘ levels
Inflation for September came in at 9.72% after August outturn of 9.78%. As we had indicated in
our last inflation comment, August was anticipated to have been the peak for headline WPI
inflation. The recent sharp currency depreciation had led us to believe that the peak of inflation
could have been postponed into September. However, this failed to be true. Primary articles
inflation fell to 11.84% from 12.58% in September and down from 15.1% in April. Food articles
inflation, as indicated by the weekly numbers, came in at 9.23% against 9.62% a month ago.
Manufactured products inflation, which forms the bulk of the index, also came in lower at 7.69%
compared to 7.79% in August. A large portion of this softer bias was however countered by the
fuel and power segment that saw a sharp rise in inflation to 14.09% from 12.84% in August. This
was due to an administered price increase in electricity, price hike in petrol in mid-September and
increases in prices of non-administered items such as naptha, bitumen, lubricants, etc.
Internals of manufactured products inflation point to a mixed picture
In line with lower commodity prices, ’basic metals alloys and metal products‘ fell to 10.94% from
11.56% in August. On the other hand, ’chemicals and chemical products‘ and ’machinery and
machinery tools‘ rose to 8.71% and 3.22% from 8.48% and 2.9%, respectively in August. ‘Food
products’ inflation remained unchanged at 9.97% in September. The four components together
account for around 42% of the total WPI. Non-food manufactured products inflation, which is
indicative of the demand pressures in the economy, fell to 7.62% from 7.74% last month. While
September may be a mixed bag in terms of manufactured goods inflation levels, Exhibit 1 shows
that there is a close correlation between the PMI manufacturing sector and the non-food
manufactured goods inflation.
We strongly advocate for a pause from RBI on October 25
Monetary policy needs to be forward looking and there are now clear indications that the peak of
inflation has possibly been attained, albeit the pace of drop in the inflation trajectory could be
slightly muted. Given that the growth is appearing to slow down now at a slightly faster pace than
earlier anticipated (as we have highlighted in our comment on October 12: ’August IIP: Clear signs
of slowdown‘), it is possibly an opportune moment for the RBI to press the pause button now and
allow for the past monetary policy tightening to impact the real sector of the economy. Further,
we expect the non-food manufacturing inflation to come off from here, a clear indication of
demand-side pressures coming off. The external environment has also now turned out to be much
more adverse than earlier anticipated. Thus, we hold on to our expressed view that RBI is unlikely
to hike rates any further on October 25 and is expected to be patient unless a QE3 type of action
provides a big upward jolt to global commodity prices.
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