WPI Inflation - Hiding the diesel hike - Anand Rathi

WPI inflation, at 4.7% in May'13, was a positive surprise. However, the data does not capture the 2% hike in diesel price. Including this, WPI inflation stood at 4.83%, a good 13bps jump in the headline inflation. Nevertheless, the underlying trend indicates further softening of WPI inflation. We expect RBI to stay sideways in Jun'13 policy and cut policy rate in Jul'13 policy, depending on the rupee trajectory.

WPI inflation continues to head South. In May'13, WPI inflation eased to a 43-month low of 4.7%, lower than consensus and our expectations and the Apr'13 figure of 4.9%.

Inflation figure does not factor diesel hike. In May'13, while diesel prices went up 2%, petrol prices fell 5%, mom. However, though today's inflation data has factored in the fall in petrol prices, it did not factor in higher diesel prices. Incorporating the 2% mom rise in diesel prices, WPI inflation in May'13 stands at 4.83% (up 13bps) and fuel inflation at 8.14% (up 82bps).

Downward revision in Mar'13 inflation. WPI inflation for Mar'13 was revised downward by 31bps to 5.7%, from 6% earlier. Interestingly, this is the second downward revision in 3.5 years; otherwise, 95% of the times WPI has faced upward revisions.

Core inflation the lowest in past 3.5 years. Non-food manufactured inflation in May'13 eased to a 41-month low of 2.4%, down from 2.8% in Apr'13. Basic metals running in deflation (-1.5%) in May'13 versus 10.6% inflation in May'12 remains the key contributor to softening of core inflation.

Food inflation hardens. After softening to a 15-month low of 6.1% in Apr'13, inflation in food articles inched up to 8.2% in May'13. Since food has a greater weight in the CPI, the CPI inflation remains near double digits.

Inflation outlook. A sharp fall in global commodity prices, particularly, metals, gold and crude oil, along with subdued domestic demand has led to a considerable softening in WPI inflation since Dec'12. On weak domestic demand and a favourable base, we expect the manufactured products inflation to continue to soften by Sep'13. Accordingly, we expect WPI inflation to soften to ~3.6% by Sep'13 and to average 4.5% in FY14. However, the sharp depreciation of the rupee versus the US dollar, if sustained, could lead to marginal pick up in imported inflation. In that case, we estimate the WPI inflation to average ~5% in FY14.

Policy outlook. RBI has already frontloaded the monetary-easing policy with 125bps cut in the repo rate and 200bps cut in CRR since Jan'12. However, the high liquidity-deficit in the system has hindered the transmission of RBI's easing actions. In the Jun'13 policy, we expect RBI to be in a wait-and-watch mode on account of a sharp depreciation of the rupee. However, RBI may cut repo rate 25-50bps in the Jul'13 policy, if the rupee reverts to pre-May'13 levels.

Source : Equity Bulls

Keywords