WPI Inflation - Aggressive monetary easing ahead - Anand Rathi

WPI inflation softened for the second consecutive month in Nov'12 on lower fuel and manufacturing indices. Core inflation, at 4.5%, slipped into RBI's comfort zone. We expect the revised WPI inflation to be above 8% in Dec'12 and start softening thereafter to 6.1% by Apr'13. We expect RBI to frontload its monetary easing in 1H2013 starting from Feb-Mar '13, with total 100bps repo rate cut in 2013.

WPI inflation softens to 10-month low. Beating consensus and our expectations for the second straight month, WPI inflation eased to 7.2% in Nov'12, the lowest since Feb'12. During Apr-Nov'12, YTD inflation stands at 7.6% versus 9.7% in Apr-Nov'11.

Core inflation in RBI's comfort zone. The non-food manufactured inflation in Nov'12 eased to a 32-month low of 4.5%, down from 5.2% in Oct'12. Food inflation, on the other hand, rose to 8.5% in Nov'12, after softening to 6.6% in Oct'12.

Manufactured inflation at 5-month low. Despite the spillover of high primary articles prices to manufactured food products, manufactured inflation has surprisingly softened to 5.4% in Nov'12 from 5.9% in Oct'12 due to price softening of non-metallic mineral products, leather products and basic metals.

Past revisions still a cause for concern. In each of the past 36 months, WPI inflation has been revised upward. The average of the past revisions stands at 54bps. Incorporating such revisions, our model suggests that WPI inflation should peak out at 8.5% in Dec'12.

Inflation outlook. The recent data on WPI inflation and foreign trade are somewhat baffling. On one hand, despite rising primary article prices and other input costs, the inability of manufacturers to pass it on to consumers indicate diminishing domestic demand. On the other hand, a record high US$40bn trade deficit during Oct-Nov'12 indicates strong domestic demand. We feel that WPI inflation data would be revised upwards considerably for Oct'12 and Nov'12. Post Dec'12, however, expectations of a bumper rabi crop and strengthening rupee, coupled with a favorable base effect, would lead to softening of WPI inflation to 6.1% by Apr'13.

Policy outlook. The simultaneous softening of WPI inflation and strong rebound in industrial growth during the current month somewhat clouds the perspective of RBI's monetary announcement on 18 Dec'12. We expect RBI to remain in the wait-and-watch mode this time around. Despite the systemic liquidity being in the deficit, government's cash balance of over Rs.1trn with RBI also reduces the likelihood of a CRR cut on 18-Dec'12. We expect RBI to start reducing repo rate from Feb-Mar '13 with total 100bps repo rate cut in 2013.

Source : Equity Bulls

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