WPI Inflation - Nearing the peak - Anand Rathi

Despite a favourable base effect, WPI inflation in Sep'12 rose to 7.8%, the highest in past 10 months. The spike was on the back of hike in fuel prices, percolation of primary inflation into manufactured products and rising sugar & pulses prices. We expect WPI inflation to reach 8.5% by Dec'12 and start softening thereafter. Our Apr'13 target for WPI inflation is 6.1%. We expect no rate cut, although 25bps CRR cut is likely on 30 Oct'12 monetary policy.

- WPI inflation heads North. WPI inflation rose to 7.8% in Sep'12, up from 7.6% in Aug '12. It was higher than market expectations of 7.7%, but lower than our estimate of 7.96%.

- Greater extent of revision. Notably, the extent of revision in the past data has increased once again. Inflation for Jul'12 was revised upward by 65bps to 7.5%, following 33bps upward revision to Jun'12 inflation.

- Transmission from primary to manufactured food products. The spillover of high primary articles prices to manufactured food products has become more evident in the past three months. In Sep'12, the manufactured-food products index rose 1.2% mom, following 2.3% and 2.0% mom increase in the past two months. Higher prices of gram powder (up 19% mom), sugar and wheat flour (up 6% mom each) led to a surge in the food products index.

- Core inflation unchanged at 5.6% but rises sequentially. Core inflation in Sep'12 remained at 5.6%, the same as in Aug'12. On mom basis however, it rose 0.4%, the highest in past three months.

- Inflation outlook. Upside risks to inflation emanate from high food prices, spillover of primary inflation into manufactured products, second round impact of the fuel price hike and high international commodity prices. We expect inflation to peak out at 8.5% by Dec'12. Increasing likelihood of a bumper rabi crop and strengthening rupee, coupled with a favourable base effect, are key factors which could soften WPI inflation considerably post Dec'12. We expect WPI inflation to soften to 6.1% in Apr'13.

- Policy outlook. Given upside risks to inflation till Dec '12, a rate cut by RBI until Dec'12 looks unlikely. We believe that the main conduit of monetary policy easing would be the liquidity channel. We expect the central bank to focus on easing liquidity through open market operations and by slashing cash reserve ratio. We feel that for transmission of softer interest rate outlook, LAF surplus is crucial. We expect no rate cut, though a 25bps CRR cut is likely in the monetary policy on 30 Oct '12.

Source : Equity Bulls

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