WPI Inflation - Softening inflation: A mirage, not oasis - Anand Rathi

Despite hike in diesel and LPG prices, WPI inflation in Oct'12 surprisingly softened to a nine-month low of 7.5% versus 8.0% in Sep'12. Second round of fuel price hike, percolation of primary inflation into manufactured products and rising prices of sugar & pulses could push WPI inflation to 8.5% by Dec'12. It could start softening thereafter, we believe. Our Apr'13 target for WPI inflation is 6.1%. Therefore, we expect RBI to start reducing the repo rate from Feb-Mar '13 with total 100bps repo rate cut in 2013.

- WPI inflation softens. Coming considerably lower that consensus and our expectations of near 8%, WPI inflation eased to 7.5% in Oct'12, down from 7.8% in Sep'12. During Apr-Oct'12, YTD inflation stands at 7.6% versus 9.7% during Apr-Oct'11.

- Greater extent of revision. The extent of upward revision in the past WPI inflation figures has increased once again. Inflation for June, July and August 2012 was revised upward to 7.6%, 7.5% and 8% from 7.3%, 6.9% and 7.6%, respectively.

- Manufactured inflation slips below 6%. Following the spillover of high primary articles prices to manufactured food products in the past three months, the manufactured inflation has surprisingly softened to 5.9% in Oct'12 from 6.3% in Sep'12 due to softening prices of leather products and basic metals.

- Core inflation softens. The non-food manufactured inflation in Oct'12 eased to 5.2%, down from 5.6% in Sep '12. On mom basis too, it rose merely 0.1%, the least in the past 15 months.

- Inflation outlook. Despite the surprise softening in WPI, we continue to believe that it could rise further until Dec '12 due to 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. However, expectations of a bumper rabi crop and strengthening rupee, coupled with a favourable base effect, are key factors that could soften WPI inflation considerably post Dec'12. We expect WPI inflation to soften to 6.1% in Apr'13.

- Policy outlook. Despite softening in WPI inflation in Oct'12, a rate cut by RBI until Dec'12 looks unlikely owing to upside risks to inflation. Rather, RBI is likely to continue with the liquidity enhancing measures - CRR cuts and OMOs - to support growth. However, we expect ~250-300bps softening in WPI inflation from Dec '12 to Apr'13. Therefore, we expect RBI to start reducing the repo rate from Feb-Mar '13 with total 100bps repo rate cut in 2013.

Source : Equity Bulls

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