WPI Inflation - Crouching growth, flying inflation - Anand Rathi

The unrelenting food and fuel prices took the Sep'13 inflation to 6.5%, a seven-month high. While low core and manufactured product inflation suggests large demand destruction, high food and fuel prices raise the possibility of spilling over of inflation. Despite inflation worries, low real growth suggests no rate action in the Oct'13 monetary policy.

WPI inflation highest since Feb'13. Ahead of market and our expectations, WPI inflation rose to 6.5% in Sep'13, from 6.1% in Jul'13. WPI inflation for Jul'13 was revised marginally upwards by 6bps to 5.85%.

Core inflation inches up. Despite slight upward movement, up from 1.4% in Aug'13 to 2.3% in Sep'13, core inflation remained modest. Notwithstanding considerable rise in input costs due to high primary inflation and imported raw material prices, the manufacturing sector is largely unable to pass on the same.

Primary inflation rose further. In contrast to the subdued trend in core/ manufactured price inflation, primary inflation went up sharply from 11.7% in Aug'13 to 13.5% in Sep'13, a 29-month high. Fuel inflation softened to 10.1% in Sep'13 from 11.3% in the previous month.

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 89%, vegetable inflation was at 15-year high. Despite an m-o-m fall in vegetable prices, the inflation rose due to an unfavourable base effect.

Inflation assessment. WPI inflation in India remains mainly supply-sided with food and fuel accounting for 80% of the inflation. In contrast, despite rising input costs (imported products and primary article), manufactured product inflation remained largely subdued.

Inflation outlook. Most growth indicators and manufactured product prices indicate considerable demand destruction and the lack of pricing power of the manufacturing sector. Yet, supply-side factors are keeping the overall inflation high. The inflation outlook currently remains largely uncertain. Seasonal trends suggest softening of food inflation. The approaching elections are likely to contain hike in fuel and power prices. However, lack of pass-through of input cost pressures in the manufacturing sector raises the inflation risk.

Policy outlook. The RBI is currently showing strong sensitivity to the rising inflation, irrespective of its source. Despite a low core inflation, the elevated WPI and CPI inflation and the latent inflation (due to lack of pass-through of high input cost pressures faced by the manufacturing sector) rule out any cut in repo/reverse-repo rates. The subdued growth situation, however, contains the possibility of a hike in these rates. Overall, we expect the RBI to keep the repo/reverse-repo rates unchanged in the Oct'13 monetary policy review. The calibrated unwinding of liquidity tightening measures initiated in Jun'13 is likely to continue.

Source : Equity Bulls

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