Inflation: WPI inflation at a 7-month high - CRISIL - Economy FirstCut

In September, WPI Inflation rose to 6.5 per cent from 6.1 per cent in August. WPI inflation has surged in the last four months from 4.6 per cent in May, due to rising inflation in primary articles and fuels. Core inflation - measured by both non-food manufacturing inflation and CRISIL Core Inflation Indicator (CCII) - continued to remain weak at 2.1 per cent and 2.7 per cent, respectively in September.

Primary articles and fuels have a nearly one-third weightage in the WPI. While good monsoons this year, both spatially and temporally, will result in an above average growth in agriculture GDP of around 4.5 per cent, high agricultural growth is unlikely to help tame food inflation. Foodgrains only have a 4.1 per cent weightage in the WPI. In August and September food inflation was driven largely by around 80 to 90 per cent rise in prices of vegetables (year-onyear). Inflation in primary non-food articles also rose sharply to above 5 per cent in September from 1.1 per cent in the previous month.

Another driver of WPI inflation is high inflation in administered fuels. For example, diesel prices have risen over 20 per cent compared to the last year as weak rupee has made subsidy burden unsustainable. Although the rupee has recovered to nearly 61-62 per US$ from lows of over 68 per US$ in August, it had averaged mere 54.6 per US$ last September. Political uncertainty in the Middle East has also kept oil prices higher than what we anticipated earlier. If political tensions in the Middle East worsen further, global crude oil prices can touch last year's highs, driving up fuel inflation including prices of market-linked fuels further.

In his maiden policy review, the Reserve Bank of India's governor Dr Raghuram Rajan stressed on inflation control as his priority. With inflation now out of RBI's comfort zone for four months in a row, we expect a 25 bps repo rate hike on October 29, 2013.

Source : Equity Bulls

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