Inflation: November 2012 - CARE

The annual rate of inflation, based on monthly WPI, stood at 7.24% for the month of November, 2012 (over November, 2011) compared with 7.45% for the previous month and 9.46% during the corresponding month of the previous year. Build up inflation in the financial year so far was 4.84% compared to a build up of 5.28% in the corresponding period of the previous year.

The inflation numbers are showing signs of moderation with figure coming down from 8% in August 2012 to 7.45 percent in October 2012 and further down to 7.24 percent in November 2012. The RBI will evidently be viewing the trends in this number as well as the components before taking a final call on interest rates. Besides, the CPI inflation numbers, which are also closely tracked by the RBI, has come at a higher level of 9.9%, which is discomforting. Given that the RBI has been implicitly looking at real interest rates, movements in this inflation number will be of interest for the central bank.

Pressures on the side of food articles appear to be resurfacing, as inflation in this segment moved from 8.9% in November 2011 to 9.4% in November 2012. This segment of inflation remains outside the purview of monetary policy and is rather severely impacted by supply-side and institutional pricing constraints. Relief from this segment may be slow to come, given delayed monsoons this year affecting the production. Lower production in several crops in the groups of cereals, pulses and oilseeds has contributed significantly to this increase in prices.

For the fuel and power category, inflation moderated to 10.02 per cent during the month from 15.4 % in November 2011. However, looking ahead, there could be pressure on prices further since the full impact of the higher diesel prices and LPG price rationalization has not yet been fully factored in the system. Also the geo political conditions, though stable as of now, need to be observed closely.

Also, the relief in inflation in the manufactured products segment has registered considerable moderation, moving down to 5.4% when compared with 9.5% in November 2011. This may be attributed more to low demand conditions, both domestic and global, as well as a relatively stable rupee relative to last year which has lowered imported inflation. Also global prices have been stable in the downward direction.

Monthly trends are in tandem, with primary articles prices mainly food articles registering higher inflation in November 2012, when compared with previous month. Manufactured products inflation has consistently moderated over the last three months as was the case with fuel and power.

CPI inflation

Retail inflation in October moved closer to the double digit mark at 9.90%, slightly up from preceding month's 9.75%. It was driven by increase in prices of food items, such as oil and fats, sugar, vegetables, pulses as well as clothing.

Overall prices for food and beverages climbed 11.81 % annually during the month, while fuel and electricity prices advanced 7.36 %. Prices of clothing, bedding and footwear were higher by 9.9% compared with last year while fuel and light went up by 7.36 percent in November.

Monetary policy action

The WPI inflation numbers have moderated with the figure coming down from September 2012 to October 2012 and further down to 7.45% in November 2012, while the retail inflation continues to move closer to double digits to 9.9% in November 2012. Thus, steps need to be implemented to improve the supply side scenario of commodities.

Sticky inflation above the level of 7% and rising IIP numbers simultaneously may not prompt the Reserve Bank to reduce lending rate in the upcoming mid-quarter review of the monetary policy on December 18. However, the moderation in the inflation numbers over the past 3 months if sustained in this direction for a another month or to, along with lower CPI inflation could allow more elbow room for the RBI to take an interest rate call in January 2013.

Presently given liquidity strain as well as pressure of advance tax payments, the RBI would prefer to go in for Open Market Operations rather than go in for a CRR cut. The earlier CRR reductions have not really led to lowering of rates of banks nor improved the net liquidity situation as reflected in the repo auctions.

Source : Equity Bulls

Keywords