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India’s September WPI inflation came in at 9.7% yoy, a tad lower than the 9.8% yoy in August. This was in
line with the Bloomberg consensus and a tad below our expectation of 9.8% yoy. On a mom basis, headline
inflation increased by 0.8% mom s.a. The July headline number was revised up to 9.4% yoy from 9.2% yoy. On a
qoq; s.a. annualized basis, September headline WPI inflation rose to 6.4% from 5.9% in August.
The drivers of headline inflation remain primary articles and fuel. As was known with the weekly data
releases, primary articles and fuel inflation continued to climb higher on a sequential basis. Fuel inflation is still
suffering from the over-hang of the hike in administered prices. The fuel index increased by 14.1% yoy from 12.8%
yoy in August.
Core inflation is coming off sequentially. On a mom basis, core prices rose only 0.3% in September, which is at
a 4.2% annualized rate. The qoq data also shows core inflation falling to 4.8% annualized in September from over
11% in April. We think that the significant slowdown in growth (see India August industrial production: Broad-based
slowdown, Asia Economics Data Flash, October 12, 2011), is already putting downward pressure on core. The yoy
number of 7.6% does not adequately capture the sequential slowdown in inflation. With demand weakening further
going forward, we think that core inflation will continue to come off. Therefore, we expect headline inflation to slow
to 6% yoy by March 2012, and fall below 5% yoy in the first quarter of FY13.
The trajectory of inflation, as evident by the September data, suggests limited gains from further rate
hikes. We think monetary policy will be ineffective in tackling the supply-side issues which are keeping food and
fuel prices elevated, and its demand restriction policies are already bearing fruit in a sequentially weakening core.
After a sharp spike between December 2010 and April 2011 driven by commodity prices, both headline and core
have stabilized but at a higher level. The yoy readings are essentially capturing the earlier spikes in the data.
We think that there are stronger reasons for the Reserve Bank of India (RBI) to pause at this stage. The
recent IP data, along with a host of other indicators suggest growth is slowing faster than expected and the
consensus estimates of growth still need to come down. Along with the sequential slowdown in core, the adverse
global environment, falling asset prices and tightening financial conditions suggest to us that the RBI should pause
to assess the trajectory of growth and inflation and the impact of its past tightening. However, recent hawkish
commentary by the RBI and its sole focus on headline yoy numbers suggests that the probability of another rate
hike on October 25 is increasing. We are therefore putting our rate call under review.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India’s September WPI inflation came in at 9.7% yoy, a tad lower than the 9.8% yoy in August. This was in
line with the Bloomberg consensus and a tad below our expectation of 9.8% yoy. On a mom basis, headline
inflation increased by 0.8% mom s.a. The July headline number was revised up to 9.4% yoy from 9.2% yoy. On a
qoq; s.a. annualized basis, September headline WPI inflation rose to 6.4% from 5.9% in August.
The drivers of headline inflation remain primary articles and fuel. As was known with the weekly data
releases, primary articles and fuel inflation continued to climb higher on a sequential basis. Fuel inflation is still
suffering from the over-hang of the hike in administered prices. The fuel index increased by 14.1% yoy from 12.8%
yoy in August.
Core inflation is coming off sequentially. On a mom basis, core prices rose only 0.3% in September, which is at
a 4.2% annualized rate. The qoq data also shows core inflation falling to 4.8% annualized in September from over
11% in April. We think that the significant slowdown in growth (see India August industrial production: Broad-based
slowdown, Asia Economics Data Flash, October 12, 2011), is already putting downward pressure on core. The yoy
number of 7.6% does not adequately capture the sequential slowdown in inflation. With demand weakening further
going forward, we think that core inflation will continue to come off. Therefore, we expect headline inflation to slow
to 6% yoy by March 2012, and fall below 5% yoy in the first quarter of FY13.
The trajectory of inflation, as evident by the September data, suggests limited gains from further rate
hikes. We think monetary policy will be ineffective in tackling the supply-side issues which are keeping food and
fuel prices elevated, and its demand restriction policies are already bearing fruit in a sequentially weakening core.
After a sharp spike between December 2010 and April 2011 driven by commodity prices, both headline and core
have stabilized but at a higher level. The yoy readings are essentially capturing the earlier spikes in the data.
We think that there are stronger reasons for the Reserve Bank of India (RBI) to pause at this stage. The
recent IP data, along with a host of other indicators suggest growth is slowing faster than expected and the
consensus estimates of growth still need to come down. Along with the sequential slowdown in core, the adverse
global environment, falling asset prices and tightening financial conditions suggest to us that the RBI should pause
to assess the trajectory of growth and inflation and the impact of its past tightening. However, recent hawkish
commentary by the RBI and its sole focus on headline yoy numbers suggests that the probability of another rate
hike on October 25 is increasing. We are therefore putting our rate call under review.
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