Inflation Update - February 2013 - Microsec

After softening for three consecutive months, India's Inflation increased to 6.84 percent YoY in February 2013. Inflation stood at a 38-month low of 6.62 percent YoY in January 2013. The rise in February headline print has primarily been on the back of a sharp increase of 21 percent MoM in LPG prices, which alone contributed around 19 basis points to Inflation. Apart from that, the underline trend of softening of Inflation continues. Most importantly, the Core Inflation has declined to three-year low of 3.77 percent YoY. As a result, the Wholesale Price Index (WPI) increased to 170.2 during February 2013 from its previous month level of 169.2, registering a sequential rise of 0.59 percent.

Group wise, Food Articles contributed the most (1.97 percent) to the overall Inflation, followed by Mineral Oils (1.39 percent), Food Products (0.78 percent), Chemicals (0.53 percent), Non-food Articles (0.50 percent) and Electricity (0.33 percent) respectively.

Inflation rate for the month of December 2012 was revised upward to 7.31 percent YoY from 7.18 percent YoY reported earlier. WPI, for the month of December 2012, was revised to 168.8 against the earlier reported number of 168.6. Among the categories, Inflation rates for Primary Articles was revised downward to 10.56 percent YoY from 10.61 percent YoY reported earlier. Inflation rate for Fuel, Power, Light and Lubricants was revised upward to 10.25 percent YoY from 9.38 percent YoY. Inflation rate for Manufactured Products remained unchanged at its earlier reported level of 5.04 percent YoY.

Outlook: Barring the revision of LPG prices (21 percent MoM increase) the underline trend of softening of Inflation continues. Prominent fall in Core Inflation is also very encouraging. We expect, WPI Inflation to decelerate further and as growth is unlikely to pick up significantly in FY2013-14, we expect this moderation to continue, considering a normal monsoon.

Policy Outlook: Weakness in GDP as well as, IIP and substantial fall in Core Inflation make adequate grounds for Reserve Bank of India (RBI) to shift focus to supporting growth and raised expectation of stronger monetary action.

We retain our 25 basis points Repo rate cut call in the March 19, 2013 policy meeting. Although, the stickiness of CPI number around 11 percent level for last couple of month provides some discomfort but Subbarao's recent comments have reinforced our view of rate cut.

Source : Equity Bulls

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