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Economy
Inflation
December WPI – don’t be fooled by the drop in headline inflation. Headline WPI
inflation in December decelerated sharply to 7.47% from 9.11% in November, the
softest print since December 2009. This sharp drop was anyway on the radar as weekly
primary articles inflation had been softening sharply, reflecting both a seasonal drop in
food prices and a favorable base effect. Manufactured inflation continues to remain
sticky at elevated levels, rising by 7.41%. October headline WPI inflation was revised to
9.87% from 9.73% previously. We do not expect the RBI to reverse its monetary policy
stance at the January 24, 2012 meeting while the language is likely to turn dovish as
growth risks have increased.
Manufactured products inflation remains above comfort zone
Manufactured products inflation showed little signs of easing and remained at uncomfortably high
levels. Manufactured products inflation came in at 7.41% in December, slightly lower than the
7.70% recorded in November. However, the moderation was on account of a favorable base as
the index rose by 0.57% mom in December versus 0.14% in November. Within manufactured
products, while all sub-indices other than ‘textiles’ and ‘paper and paper products’ rose, the
greatest price pressures were seen in ‘non-metallic mineral products’ (2.03% mom), followed by
‘leather and leather products’ (1.23% mom) and ‘chemical and chemical products’ (1.04% mom).
This possibly reflects the negative impact of the steep Rupee depreciation (14.5% since August) on
the landed costs of imports, as global commodity prices have largely been range-bound during this
period. RBI’s preferred measure of demand-side pressures in the economy, i.e. non-food
manufactured inflation, remains sticky at 7.69% from 7.90% in November. With the Rupee down
13.5% FYTD, this measure of inflation is likely to remain sticky even as domestic demand eases.
Primary articles inflation decelerates sharply on seasonal factors and base effect
Primary articles inflation dropped sharply in December to 3.07% from 8.53% in November, the
lowest reading since August 2005. The sharp deceleration in primary articles was purely led by
primary food articles as both non-food articles and minerals index rose over the month (1.3%
mom and 2.6% mom, respectively). Primary food articles index declined by 3.1% mom on the
back of a 25.3% decline in vegetable prices as the new crop made its way into the market.
However, other food items showed no such softening—protein-rich items of milk, eggs, fish etc.
as a group rising by 1.1% mom with an annual rate of inflation at 11.41% (marginally higher than
11.34% in November). Food inflation could once again start rising going forward as the base
effect wears out. Additionally, a drought has been reported in Andhra Pradesh and Karnataka and
trends on rabi sowing have not been quite encouraging.
Policy reversal by RBI still down the road
We expect headline WPI inflation to remain below 7.0% in the coming months and end the year
in a range of 6.2-6.5%. With manufactured products inflation continuing to remain at elevated
levels and the current correction on base effect and seasonal decline in prices expected to reverse
partially, RBI is likely to watch the trends on inflation before reversing its monetary policy. More
importantly, the non-food manufactured inflation could also reverse in the coming period as the
PMI manufacturing has witnessed a turnaround. This component could also be impacted by the
global commodity prices and the currency dynamics, both of which remain hazy given
uncertainties in global risk conditions. Even as liquidity tightness has aggravated sharply, we do
not expect RBI to cut the CRR on January 24, 2012 as RBI has consistently aired a view that the
CRR is a monetary policy tool rather than a means of liquidity injection. While RBI will continue to
manage the liquidity deficit via OMO operations, repo rate cuts are likely to get pushed to April
2012.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Inflation
December WPI – don’t be fooled by the drop in headline inflation. Headline WPI
inflation in December decelerated sharply to 7.47% from 9.11% in November, the
softest print since December 2009. This sharp drop was anyway on the radar as weekly
primary articles inflation had been softening sharply, reflecting both a seasonal drop in
food prices and a favorable base effect. Manufactured inflation continues to remain
sticky at elevated levels, rising by 7.41%. October headline WPI inflation was revised to
9.87% from 9.73% previously. We do not expect the RBI to reverse its monetary policy
stance at the January 24, 2012 meeting while the language is likely to turn dovish as
growth risks have increased.
Manufactured products inflation remains above comfort zone
Manufactured products inflation showed little signs of easing and remained at uncomfortably high
levels. Manufactured products inflation came in at 7.41% in December, slightly lower than the
7.70% recorded in November. However, the moderation was on account of a favorable base as
the index rose by 0.57% mom in December versus 0.14% in November. Within manufactured
products, while all sub-indices other than ‘textiles’ and ‘paper and paper products’ rose, the
greatest price pressures were seen in ‘non-metallic mineral products’ (2.03% mom), followed by
‘leather and leather products’ (1.23% mom) and ‘chemical and chemical products’ (1.04% mom).
This possibly reflects the negative impact of the steep Rupee depreciation (14.5% since August) on
the landed costs of imports, as global commodity prices have largely been range-bound during this
period. RBI’s preferred measure of demand-side pressures in the economy, i.e. non-food
manufactured inflation, remains sticky at 7.69% from 7.90% in November. With the Rupee down
13.5% FYTD, this measure of inflation is likely to remain sticky even as domestic demand eases.
Primary articles inflation decelerates sharply on seasonal factors and base effect
Primary articles inflation dropped sharply in December to 3.07% from 8.53% in November, the
lowest reading since August 2005. The sharp deceleration in primary articles was purely led by
primary food articles as both non-food articles and minerals index rose over the month (1.3%
mom and 2.6% mom, respectively). Primary food articles index declined by 3.1% mom on the
back of a 25.3% decline in vegetable prices as the new crop made its way into the market.
However, other food items showed no such softening—protein-rich items of milk, eggs, fish etc.
as a group rising by 1.1% mom with an annual rate of inflation at 11.41% (marginally higher than
11.34% in November). Food inflation could once again start rising going forward as the base
effect wears out. Additionally, a drought has been reported in Andhra Pradesh and Karnataka and
trends on rabi sowing have not been quite encouraging.
Policy reversal by RBI still down the road
We expect headline WPI inflation to remain below 7.0% in the coming months and end the year
in a range of 6.2-6.5%. With manufactured products inflation continuing to remain at elevated
levels and the current correction on base effect and seasonal decline in prices expected to reverse
partially, RBI is likely to watch the trends on inflation before reversing its monetary policy. More
importantly, the non-food manufactured inflation could also reverse in the coming period as the
PMI manufacturing has witnessed a turnaround. This component could also be impacted by the
global commodity prices and the currency dynamics, both of which remain hazy given
uncertainties in global risk conditions. Even as liquidity tightness has aggravated sharply, we do
not expect RBI to cut the CRR on January 24, 2012 as RBI has consistently aired a view that the
CRR is a monetary policy tool rather than a means of liquidity injection. While RBI will continue to
manage the liquidity deficit via OMO operations, repo rate cuts are likely to get pushed to April
2012.
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