WPI inflation moderates raising hope for rate cut - Angel Broking

Wholesale Price Index (WPI) inflation for the month of December 2012 receded slightly to 7.18% yoy as compared to 7.24% yoy in the previous month. On a 3MMA basis too, headline WPI inflation eased to 7.3% yoy as compared to 7.5% yoy in November 2012. WPI inflation moderated for the third straight month owing to deceleration in the pace of manufactured products and fuel inflation. Core inflation eased further to 4.2% yoy as compared to 4.5% yoy in the previous month and 8.0% yoy in the corresponding period of the previous year. Inflation for October 2012 has been revised downwards from 7.5% yoy to 7.3% yoy as inflation in primary articles stood revised at 7.8% yoy as against 8.2% yoy reported earlier.

Primary articles inflation paced higher to double digits (10.6% yoy) during the month as compared to 9.4% yoy in the previous month and 3.6% yoy in the corresponding period of the previous year. Amongst this category, inflation in food articles edged upwards to 11.2% yoy as compared to 8.5% yoy in November 2012 and 0.8% yoy in December 2011. Fuel and power inflation decelerated for the third straight month to 9.4% yoy from 10.0% yoy in the previous month and 15.0% in December 2012. This can be attributed to deceleration in mineral oil inflation (7.6% yoy from 8.5% yoy in the previous month) owing to the index for naphtha, furnace oil and ATF fuel. Despite elevated inflation in manufactured food products (9.0% yoy as against 10.0% yoy in the previous month), inflation in the overall Manufactured products category cooled to 5.0% yoy owing to declining commodity prices.

We believe that the recent data points including decline in industrial production, moderation in headline inflation print for the third straight month, and easing of the core component within the Reserve Bank of India (RBI)'s comfort zone, make for adequate grounds for monetary policy easing by the RBI. In its third quarter monetary policy review on January 29, 2013, we expect the RBI to reduce the repo rate by 25bp.

At the same time, the present moderation in inflation is unlikely to continue going ahead post the fiscal year end. We believe that upside bias to inflation is likely from factors such as the recent hike in railway passenger fares and implementation of the much-discussed hike in diesel prices since it would release suppressed inflation in the economy and fuel inflationary pressures in the shortterm, although beneficial for the medium-term outlook. We believe that managing inflationary pressures remains one of the key priorities of the RBI. Therefore, unless the fiscal deficit is brought to manageable levels and the emanating inflationary pressures contained, it is unlikely to get elbow room for adopting an aggressive easing policy. For CY2013, we expect the RBI to ease policy rates by about 75bp-100bp.

In contrast the new Consumer Price Index (CPI) inflation series starting January 2012 reached an all-time high at 10.6% in December 2012, inching upwards from 9.9% in November 2012. This is mainly because the retail inflation index gives a high weightage to food inflation which continues to remain elevated in the economy.

Source : Equity Bulls

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