WPI inflation softens to 40-month low - Angel Broking

Wholesale Price Index (WPI) inflation for March 2013 moderated to more than a three-year low in March 2013. It came in at 6.0% as compared to 6.8% in the previous month and 7.7% in March 2012. The deceleration in inflation can mainly be attributed to softening primary article (particularly food) inflation. Core inflation receded for the seventh straight month to 3.4% as compared to 3.8% in the previous month and 5.0% in the corresponding month of the previous year, reflecting the decline in commodity prices on a yoy basis and weak pricing power in manufacturing. At the same time, the trend of upward revisions in provisional inflation data does not bode well for the inflationary trajectory. Inflation for the month of January 2012 has been revised upwards to 7.3% as against 6.6% reported earlier, due to revision in fuel and primary article inflation.

Inflation in primary articles moderated to 7.6%, its lowest level during the fiscal year, as compared to 9.7% in the previous month and 10.4% in March 2012. This deceleration can mainly be attributed to cooling food inflation. Food inflation came in at 8.7% as compared to above double-digit rise in the three preceding months mainly as vegetables reported a 0.9% decline in prices and fruits, milk and protein-rich items reported some moderation. Although inflation in another subcomponent ie food-grains moderated from 18.4% in the previous month, it still remained elevated at 16.8% in March 2013. It contributed about 80bp to the overall headline 6.0% print.

Fuel and power inflation remained high at 10.2%, owing to steps taken by the government towards fuel price adjustment. For March 2013, inflation in LPG and high speed diesel came in at 25.7% and 21.2% respectively, as compared to 14.3% and 9.2% in the corresponding period of the previous year. Together, they contributed about 125bp to the overall WPI inflation. As we had expected, the fuel inflation index for January 2013 has been revised sharply upwards to 9.3%, from 7.1% reported earlier.

Manufactured products inflation moderated for the seventh straight month and decelerated to about a 40-month low. It came in at 4.1% as compared to 5.2% in March 2012. Inflation in manufactured food products stood at 7.0%, but it is the non-food manufactured component that has cooled down considerably owing to decline in commodity prices on a yoy basis and weak pricing power. Core inflation, ie the non-food manufacturing component of inflation, softened further to 3.4% as compared to 3.8% in the previous month and 5.0% in March 2012.

Despite the widening of the current account deficit, which has likely peaked at 6.7% of GDP in FY2013, we see scope for policy easing by the RBI in its annual monetary policy owing to the moderating trend in WPI inflation and the recent easing in CPI inflation. Growth for FY2013 is likely to decelerate to a decade-low of 5.0%. In addition, industrial production remains weak, posting a growth of 0.9% over April - February of FY2013.

The RBI's monetary policy stance has veered towards supporting growth; nonetheless its guidance remains hawkish. So far in CY2013, it has cut the policy rate by 50bp but monetary transmission has been limited due to the wedge between credit-deposit growth. We expect the RBI to cut the repo rate by 25bp on May 3, 2013.

Source : Equity Bulls

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