WPI Inflation - Vegetable at 15-year high, core 4-year low - Anand Rathi

For the first time since Feb'13, WPI inflation crossed 6% in Aug'13. Food and fuel contributed 85% of the inflation, while the core inflation collapsed to 45-month low. We expect inflation to start softening in the near term and the yearly average inflation to be ~5%. The forthcoming monetary policy review is unlikely to change the policy rates.

WPI inflation highest since Feb'13. Ahead of market and our expectations, WPI inflation rose to 6.1% in Aug'13, from 5.9% in Jul'13. WPI inflation for Jun'13 was revised upwards by 30bps to 5.1%.

Core inflation at 45-month low. Depicting the considerable demand destruction in the economy, core (non-food, non-fuel) inflation softened to 1.4%, the lowest since Nov'09. The non-food manufactured product inflation, RBI's proxy of core inflation, declined to 1.9% - also a 45-month low.

Primary inflation at 23-month high. In contrast to the deflationary trend in core/ manufactured price inflation, primary and fuel inflation have gone up sharply in Aug'13. Primary product inflation was at 23-month high, while fuel inflation was at 10-month high.

Vegetables inflation at 15-year high. A key reason for the increase in primary and food inflation is the rising vegetable and fruits inflation. In particular, at 78%, vegetable inflation was at 177-month or roughly 15-year high. The month-over-month annualized jump in vegetable and fruits inflation in Aug'13 has been over 180%.

Inflation assessment. The spike in inflation in Jul'13 was largely a pass-through of large rupee depreciation in manufactured product prices. In Aug'13, however, high food prices and crawling pass-though of higher imported fuel costs into administered prices led to the jump in inflation. Food and fuel contributed 85% of the overall inflation. The broader trend remains largely deflationary with 44% of the WPI basket recording less than 2.5% inflation.

Inflation outlook. Going by the past seasonality and a good monsoon, we expect the food inflation to start softening considerably in the coming months. The marked demand destruction is likely to contain manufactured product inflation, despite cost pressures due to rupee depreciation. Also, the impending elections could mute the rise in fuel prices. We expect average inflation in FY14 to be ~5%.

Policy outlook. RBI's renewed focus on ensuring price stability, irrespective of the nature of inflation, raises the possibility of monetary tightening (especially after rising WPI inflation in past three months and above-expected growth in industrial production in Jul'13). Yet, the subdued growth performance and collapse in core inflation could play countervailing influence against such a move. We expect no interest rate action in the forthcoming monetary policy review.

Source : Equity Bulls

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