Inflation - Will rupee depreciation keep head rolling? - ICICIdirect

Key readings...

- WPI inflation moderated to 4.7% in May 2013 against market expectation of 4.88% (Bloomberg Survey). Seasonally the headline index remained flat as increase in food inflation was offset by decline in the fuel index

- Fuel group inflation declined to 7.3% and was seasonally down 1.34%.

- Food articles inflation accelerated to 8.9% from 6.1% while manufactured goods inflation was marginally up 3.1% against 3.4%

- The March 2013 inflation was revised lower to 5.69% against 5.96% provisional breaking the trend of upward revision. The lower revision was primarily due to cutback in the fuel inflation to 7.76% from provisional 10.18%. Average inflation for FY13 therefore stands at 7.35% Lower global crude oil and coke prices drags fuel inflation lower...

- Despite that Coal India Ltd (the largest supplier of non coking coal in India) has not reduced the non coking coal prices, the non coking coal index was revised downwards by 21% which is a surprise. The coking coal index was revised upwards by 6% effective March 2013. Another much delayed revision of 13% came in the electricity index

- The decline in non subsidized LPG, Petrol, ATF, and other decontrolled fuels have offset the rise in electricity and the coking coal index. The fuel index therefore saw a decline of 1.3% MoM

Food inflation reverts

- Double digit increase in price of veggies like Potato and Brinjal since April 2013 and ~ 14% rise in cereal prices (tracking the increase in Minimum Support Prices) contributed to higher food inflation

- While spatial distribution of monsoon will guide the food inflation trajectory, its early arrival has resulted in surge in vegetable prices Slow down impact visible in the downward trending core inflation

- Core inflation has softened since last seven months and now stands at 2.4%. While the main reason can be decline in the global prices (ferrous and non ferrous metals, chemicals etc.,), effect of domestic slow down cannot be denied.

Rupee depreciation scares market expectations of rate cut...

Rupee has depreciated by 7% since the start of the year. Therefore, while the headline inflation has seen softening in the current reading, a spurt on account of imported inflation cannot be ruled out. Every 1% change in rupee adds 20-25 bps to the headline inflation. However, we believe the impact of depreciation in rupee may be partly offset by demand slow down as price pass on becomes difficult. In the near term, it may also elevate inflationary expectations thereby forcing RBI to continue with its anti inflationary stance when it meets for the mid quarter review on Monday. Also, INR depreciation further aggravates concerns over CAD. This may delay the repo rate cuts from RBI but we continue to believe that fall in WPI inflation definitely is a positive for RBI to support growth and expect a 50bps repo rate cut in FY14.

Source : Equity Bulls

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