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Economy
Inflation
August WPI: No respite yet. Headline inflation for August was at 9.78%, in line with
our expectations and higher than the July number of 9.22%. Encouragingly, the June
inflation rate was revised only modestly to 9.51% from the provisional reading of
9.44%, in contrast to the earlier trends of sharp revisions. However, from the RBI’s
policy perspective, the current print offers no comfort as demand-related pressures
appear to stay intact. Non-food manufacturing inflation edged up to 7.74% from
7.48% in July. Our calculations indicate that inflation could have peaked in August,
though pressures are unlikely to come off immediately. We continue to expect the RBI
to raise the repo rate by 25 bps on September 16.
Demand-related inflationary pressures remain strong
Manufactured products inflation rose to 7.79% in August from 7.49% in July, with the index
rising by 0.44% mom. The break-up of manufactured products suggest a continued pass-through
of firm global commodity prices onto domestic prices as segments such as ‘base metals and alloys
and metal products’, ‘chemical and chemical products’, ‘textiles’ etc. continue to experience high
rates of inflation. As a result, non-food manufactured inflation, which is closely tracked by the RBI
to gauge demand-side pressures, rose to 7.74% in August from 7.48% in July. With much of the
August decline in global commodity prices being reversed, and INR also sharply weaker, there is
unlikely to be any immediate comfort on commodity-related inflation.
Primary articles inflation firms, so does fuel inflation
As indicated by the weekly inflation data, primary articles inflation rose to 12.58% in August from
11.30% in July, with the index rising by 0.86% mom. Trends in food articles inflation remain
worrisome, with inflation firming to 9.6% from 8.2% in July. While inflation in protein-related
food items has remained stubbornly high owing to the structural factors, the somewhat benign
trends that had appeared in pulses as well as vegetable (combined weight 17% in food articles)
have reversed over the past two months. Earlier today, Agriculture Secretary Mr. P.K. Basu
indicated that the output of lentils in 2011-12E could drop, which could result in renewed price
pressures. Non-food articles inflation also accelerated in August to 17.75% from 15.51% in July,
on the back of a 37% rise in fibres index (jumped by 5.8% mom after declining by 29% in the
past 3 months) and a 16.3% rise in oilseeds index (rose by 3% mom).
Fuel and power index rose to 12.84% in August from 12.04% in July, as a result of an upward
revision in the non-administered fuel basket.
RBI to retain its anti-inflation stance, hike repo rate on September 16
Headline inflation has risen to a 13-month high in August and although we expect this to be the
peak in inflation, headline inflation will in all probability remain above 9% till November and
moderate gradually thereafter. This first big dose of moderation will likely be on account of a
favorable base effect and the hope that late rains such as that of the last year do not pose damage
to some key crop items such as fruits and vegetables. Our model also assumes that global
commodity prices will remain range-bound. However, the risk in this assumption is that further
monetary policy easing by developed economy central banks could boost commodity prices, and
negate some of the positive impact of a high base. Additionally, downside risks to growth seem
exaggerated to us, as tax collections remain buoyant and service sector indicators remain steady.
In the July policy review, the RBI had indicated that its stance will change once a sustainable
downturn in inflation is seen. There is no such sign immediately and hence, we do not expect any
change in the RBI’s anti-inflationary policy stance. We thus continue to look for a 25 bps hike by
the RBI on September 16, 2011 and thereafter being on an extended pause.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Inflation
August WPI: No respite yet. Headline inflation for August was at 9.78%, in line with
our expectations and higher than the July number of 9.22%. Encouragingly, the June
inflation rate was revised only modestly to 9.51% from the provisional reading of
9.44%, in contrast to the earlier trends of sharp revisions. However, from the RBI’s
policy perspective, the current print offers no comfort as demand-related pressures
appear to stay intact. Non-food manufacturing inflation edged up to 7.74% from
7.48% in July. Our calculations indicate that inflation could have peaked in August,
though pressures are unlikely to come off immediately. We continue to expect the RBI
to raise the repo rate by 25 bps on September 16.
Demand-related inflationary pressures remain strong
Manufactured products inflation rose to 7.79% in August from 7.49% in July, with the index
rising by 0.44% mom. The break-up of manufactured products suggest a continued pass-through
of firm global commodity prices onto domestic prices as segments such as ‘base metals and alloys
and metal products’, ‘chemical and chemical products’, ‘textiles’ etc. continue to experience high
rates of inflation. As a result, non-food manufactured inflation, which is closely tracked by the RBI
to gauge demand-side pressures, rose to 7.74% in August from 7.48% in July. With much of the
August decline in global commodity prices being reversed, and INR also sharply weaker, there is
unlikely to be any immediate comfort on commodity-related inflation.
Primary articles inflation firms, so does fuel inflation
As indicated by the weekly inflation data, primary articles inflation rose to 12.58% in August from
11.30% in July, with the index rising by 0.86% mom. Trends in food articles inflation remain
worrisome, with inflation firming to 9.6% from 8.2% in July. While inflation in protein-related
food items has remained stubbornly high owing to the structural factors, the somewhat benign
trends that had appeared in pulses as well as vegetable (combined weight 17% in food articles)
have reversed over the past two months. Earlier today, Agriculture Secretary Mr. P.K. Basu
indicated that the output of lentils in 2011-12E could drop, which could result in renewed price
pressures. Non-food articles inflation also accelerated in August to 17.75% from 15.51% in July,
on the back of a 37% rise in fibres index (jumped by 5.8% mom after declining by 29% in the
past 3 months) and a 16.3% rise in oilseeds index (rose by 3% mom).
Fuel and power index rose to 12.84% in August from 12.04% in July, as a result of an upward
revision in the non-administered fuel basket.
RBI to retain its anti-inflation stance, hike repo rate on September 16
Headline inflation has risen to a 13-month high in August and although we expect this to be the
peak in inflation, headline inflation will in all probability remain above 9% till November and
moderate gradually thereafter. This first big dose of moderation will likely be on account of a
favorable base effect and the hope that late rains such as that of the last year do not pose damage
to some key crop items such as fruits and vegetables. Our model also assumes that global
commodity prices will remain range-bound. However, the risk in this assumption is that further
monetary policy easing by developed economy central banks could boost commodity prices, and
negate some of the positive impact of a high base. Additionally, downside risks to growth seem
exaggerated to us, as tax collections remain buoyant and service sector indicators remain steady.
In the July policy review, the RBI had indicated that its stance will change once a sustainable
downturn in inflation is seen. There is no such sign immediately and hence, we do not expect any
change in the RBI’s anti-inflationary policy stance. We thus continue to look for a 25 bps hike by
the RBI on September 16, 2011 and thereafter being on an extended pause.
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