WPI Inflation - Food falls - Anand Rathi

WPI inflation in Mar'13 eased to a 40-month low of 6.1%, below RBI's estimate for Mar'13 at 6.8%. Further, core inflation declined to 3.5%. Inflation softening, coupled with a sharp deterioration in growth, could push RBI for further easing in the May'13 policy meet. We expect market interest rates to dip further in the next six months, which bodes well both for the economy and corporate earnings.

Mar'12 inflation, at 6%, relieving. WPI inflation eased to a forty-month low of 6% in Mar'13 (vs. consensus: 6.4%, ARG: 6.1%), from 6.8% in Feb'13. Jan'13 inflation was revised to 7.3%, from 6.6% earlier. Inflation for full year FY13 stood at 7.3% vs. 8.9% in FY12.

Food inflation back in single digit. Inflation for food articles eased to a five-month low of 8.7% in Mar'13, from 11.4% in Feb'13. Since food has higher weight in the CPI, softening in food inflation bodes well.

Core inflation hits three-year low. Non-food manufactured inflation in Mar'13 eased to a 37-month low of 3.5%, down from 3.8% in Feb'13. A sharp softening of basic metal inflation to 0.9% in Mar'13 vs. 10.1% in Mar'12 contributed to softening of core inflation.

Fuel inflation still in double digits. Fuel inflation stood at 10.2% in Mar'13, marginally lower than 10.5% in Feb'13. Partial deregulation of diesel prices contributed to high fuel inflation.

Inflation outlook. Significant softening in manufactured inflation, which has the highest weight in the WPI (65%), has been the core reason for the much-awaited softening in WPI inflation. Food and fuel are the main categories which have been pushing WPI inflation up. Though fuel inflation is still in double digits, food inflation has started easing. With the rabi crop hitting the markets in Apr'13, we expect further softening in food inflation. A considerable softening in the international crude oil prices would lead to softening in domestic fuel inflation too. We expect the trend of softer inflation to continue in the next couple of months. Assuming a normal monsoon this year, we expect the headline inflation to remain largely benign in 2013 compared with the past couple of years.

Policy outlook. WPI inflation has softened below RBI's estimate of 6.8% in Mar'13, and core inflation is in RBI's comfort zone for the fifth consecutive month. On account of these, coupled with weakening growth outlook, we expect RBI to cut the repo rate 25bps during the annual monetary policy on 03 May'13. We continue with our call of overall 100bps cut in CY13. The main focus of the monetary policy still remains easing of liquidity, especially through open market operations. We expect the market interest rates to dip further in the next six months, which bodes well both for the economy and corporate earnings.

Source : Equity Bulls

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