WPI Inflation - Pleasant surprise continues - Anand Rathi

Led by a sharp softening in manufactured products inflation, WPI inflation in Apr'13 eased to a 41-month low of 4.9%. Core inflation slipped to 2.8%. With WPI inflation falling within the RBI's comfort zone, we expect it to cut the repo rate by 25bps in the next two months.

Apr'13 inflation falls to 41-month low. In Apr'13 WPI inflation eased to a 41-month low of 4.9%, lower than consensus and our expectations of 5.5% and the Mar'13 figure of 6%. Inflation for Feb'13, however, was raised by 44bps, to 7.3%, from 6.8% earlier.

Lowest core inflation since Feb'10. Non-food manufactured inflation in Apr'13 eased to a 39-month low of 2.8%, down from 3.5% in Mar'13. Basic metals turning into deflation (-1%) in Apr'13 vs 11.1% inflation in Apr'12 contributed to the softening of core inflation.

Food inflation continues to ease. Inflation in food articles eased to a 15-month low of 6.1% in Apr'13, from 8.7% in Mar'13. Since food has a greater weight in the CPI, softening in food inflation augurs well for CPI inflation softening .

Fuel inflation off the double-digit mark. Fuel inflation softened to 8.8% in Apr'13, lower than the 10.2% of Mar'13. Since Feb'10, India has experienced double-digit fuel inflation (averaging 12.2%) due to high crude oil prices internationally and a weaker rupee.

Inflation outlook. Significant softening in manufactured inflation, which has the highest weighting in the WPI (65%), has been behind the sharp softening in WPI inflation in the last four months. Inflation in food and fuel has also started softening. The second advance estimates of the 2012-13 rabi crop indicated that foodgrain production in the ongoing rabi season would be 1.5% higher than the targeted 125.5m tons. With the rabi crop now arriving in markets, we expect food inflation to further soften. A sharp softening in international commodity prices would help reduce imported inflation in India. Nevertheless, we do not expect WPI inflation to soften very significantly from current levels because of the phasing out of the favourable base effect and expect it to range between 4.5% and 5.5% in the next six months.

Policy outlook. The RBI has already frontloaded the monetary-easing policy with a 125-bp cut in the repo rate and a 200-bp cut in the CRR since Jan'12. However, the high liquidity-deficit in the system has hindered the transmission of the RBI's easing actions. Ahead, we expect another 25-bp cut in the repo rate in the next two months, with the RBI focusing on the transmission of the accommodative monetary policy. We expect the RBI to continue with its aggressive OMOs in FY14. We maintain our call that the market interest rates would dip further in the next six months, which augurs well both for the economy and corporate earnings.

Source : Equity Bulls

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