Negative inflation surprise - Angel Broking

The Wholesale Price Index (WPI) based inflation surprised negatively by coming in at 6.46% during September as compared to market expectations of 6.0%. WPI inflation inched towards a seven-month high and compares with readings of 6.10% in August 2013 and 8.07% in September 2012. The pick-up in headline print can be attributed mainly to primary articles (owing to higher food as well as non-food inflation) and manufactured articles. Consumer Price Index (CPI) inflation for September 2013 also surprised negatively as it picked up to 9.84% as compared with expectations of a 9.5% print.

WPI Inflation

Inflation in primary articles at 13.54% has touched a 29-month high in September 2013 as compared to 11.72% in August 2013 and 9.22% in the corresponding period of the previous year. Food as well as non-food inflation contributed to this sequential increase in inflation in primary articles. Food inflation inched up slightly to 18.4%, remaining elevated owing to continued high vegetable (89.37%) and fruit (13.5%) inflation. Inflation in non-food primary articles also reported an increase to 5.17% as against 1.06% in the previous month.

Although inflation in fuel and power continued to remain in double-digits for the third straight month, during the month it moderated to 10.08% as compared to 11.34% in the previous month and 12.0% in September 2012. However, on a sequential basis, the index witnessed considerable rise as inflation in mineral oils reported a 3.7% mom rise driven by Aviation Turbine Fuel and diesel prices.

The secular trend of moderation in inflation of manufactured articles for 12 straight months ceased during September 2013. Manufactured products inflation reported a rise to 2.03% as against 1.90% in August 2013. Manufactured food inflation decelerated for the seventh consecutive month to 1.61% from 1.70% in the previous month. Core (non-food, non-fuel) inflation slightly picked up to 2.1% from 2.0% in August 2013, mainly reflecting the pass-through impact of INR depreciation.

CPI Inflation

The combined (rural + urban) Consumer Price Index (CPI) inflation for September 2013 inched up to 9.84% as compared to 9.52% in August 2013. Worryingly, the contribution to a spike is driven by food, fuel as well as core inflation. Similar to trends in WPI inflation the food component in CPI is driven largely by vegetable and fruits inflation. Core CPI inflation continues to remain above the 8.0% mark. It picked up for the third straight month to 8.4% as compared to 8.2% in the previous month.

Policy Guidance

Headline WPI inflation has meaningfully picked up over the last three months. Even as food inflation is anticipated to ease going ahead, it is unlikely to lead to a substantial moderation in headline WPI inflation (also likely to be impacted by imported inflation and low base). In addition CPI inflation has also risen and remains sticky at near double-digit levels, keeping elevated inflationary expectations intact. We expect the RBI to hike the repo rate by 25bp to 7.75% in its next policy review due on October 29, 2013.

The INR has appreciated by more than 10% from its record low and is now stabilizing at present levels, providing comfort to policymakers on the currency front. In view of this, we believe that the RBI is likely to get some headroom for easing some of the exceptional short-term liquidity tightening measures. We expect the RBI to reduce the marginal standing facility (MSF) rate by 25bp. We thus expect the corridor between the repo and MSF to normalize at 100bp from 150bp currently.

Source : Equity Bulls

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