Inflation softens to 41-month low - Angel Broking

Wholesale Price Index (WPI) inflation for April 2013 moderated for the third straight month to 4.89%, a 41-month low as compared to 5.96% in the previous month and 7.50% in April 2012. The deceleration is broad-based since inflation across primary articles, fuel and manufactured articles has moderated. Core inflation softened for the eighth straight month to 2.7% as compared to 3.4% 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 as well as weak pricing power in manufacturing. We believe that the softening trend in both WPI and CPI inflation is likely to give the RBI scope for easing the monetary policy rate. We expect a 25bp repo rate cut in its June policy review.

Worryingly however, the headline inflation for February 2013 has been revised upwards by 44bp to 7.3% owing to revision across categories - primary articles (by 84bp), fuel (by 17bp) and manufactured articles (by 28bp). Earlier, inflation for January 2013 was also revised similarly by about 70bp to 7.3% from 6.6% reported earlier and such revisions do not bode well for the inflationary trajectory.

Primary articles - weightage 20.1%

Inflation in primary articles moderated to a 15-month low at 5.8% as compared to 7.6% in the previous month and 9.6% in April 2012 owing to deceleration of inflation in food and non-food articles. Inflation in food articles (at double-digits for most of FY2013) came in at 6.1% as compared to 8.7% in March 2013. This moderation can be attributed to the 4.1% decline in inflation for fruits and vegetables. In particular inflation in vegetables aided by a high base effect declined by 9.0% as against a steep 61.9% rise in April 2012.

Although inflation in food articles has moderated, it remains above double-digits at 15.6% for cereals and 10.3% for pulses. The Consumer Price Index (CPI) gives 49.7% weightage to the food basket and it moderated to a 13-month low in April 2013 at 9.4% in line with moderation in food inflation.

Fuel and power - weightage 14.9%

Inflation in fuel and power decelerated to 8.8% during the month as compared to 10.2% in March 2013 and 12.1% in April 2012. Its contribution to overall headline inflation came off from 168bp in the previous month to 144bp in April 2013. However, a key to note is that the coal price index is flat since January as it has not been revised and electricity tariff revision by some states has not yet been incorporated and these revisions are likely to push up the index going ahead.

Manufactured products - weightage 65.0%

Inflation in manufactured products decelerated for the seventh straight month to 3.4% in April 2013 as compared to 4.1% in March 2013 and 5.3% in the corresponding period of the previous year. Core inflation ie the non-food manufacturing component of inflation softened further for the eight consecutive month to 2.7% as compared to 3.4% in the previous month and 5.0% in April 2012. The deceleration in core inflation can be attributed to decline in commodity prices on a yoy basis as well as continued weakness in pricing power.

In light of the positive surprises in WPI and CPI inflation and the benign outlook going ahead for global commodity and crude prices, we see scope for policy easing by the RBI in its June monetary policy review. We expect the RBI to cut the repo rate by 25bp at its June 17 policy meet. But on the other hand the trade deficit soared by 72.6% mom during April 2013 and in view of risks from the current account deficit we expect the RBI to reiterate its cautious stance on policy easing going forward and focus on monetary transmission.

Source : Equity Bulls

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