WPI Inflation Update | Economy

April 15, 2013

WPI Inflation Update March 2013

Inflation softens to 40-month low
Key highlights

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

Wholesale Price Index (WPI) inflation for March 2013 moderated to more than a three-year low in March 2013. It came in at 6.0% as compared to 6.8% in the previous month and 7.7% in March 2012.

The deceleration in inflation can mainly be attributed to softening primary article (particularly food) inflation.

Core inflation receded for the seventh straight month to 3.4% as compared to 3.8% in the previous month and 5.0% in the corresponding month of the previous year, reflecting the decline in commodity prices on a yoy basis and weak pricing power in manufacturing.

At the same time, the trend of upward revisions in provisional inflation data does not bode well for the inflationary trajectory. Inflation for the month of January 2012 has been revised upwards to 7.3% as against 6.6% reported earlier, due to revision in fuel and primary article inflation.

We expect a 25bp repo rate reduction in the Reserve Bank of India (RBI)s annual monetary policy meet on May 3, 2013.

Trends in Inflation for the month of March 2013

Primary articles weightage 20.1%
Inflation in primary articles moderated to 7.6%, its lowest level during the fiscal year, as compared to 9.7% in the previous month and 10.4% in March 2012. This deceleration can mainly be attributed to cooling food inflation. Food inflation came in at 8.7% as compared to above double-digit rise in the three preceding months mainly as vegetables reported a 0.9% decline in prices and fruits, milk and protein-rich items reported some moderation. Although inflation in another sub-component ie food-grains moderated from 18.4% in the previous month, it still remained elevated at 16.8% in March 2013. It contributed about 80bp to the overall headline 6.0% print. The recent easing in CPI inflation for March 2013 to 10.4% as compared to 10.9% in the previous month is also largely on account of the deceleration in food inflation.

Fuel and power weightage 14.9%

Fuel and power inflation remained high at 10.2%, owing to steps taken by the government towards fuel price adjustment. For March 2013, inflation in LPG and high speed diesel came in at 25.7% and 21.2% respectively, as compared to 14.3% and 9.2% in the corresponding period of the previous year. Together, they contributed about 125bp to the overall WPI inflation. As we had expected, the fuel inflation index for January 2013 has been revised sharply upwards to 9.3%, from 7.1% reported earlier.

Please refer to important disclosures at the end of this report

WPI Inflation Update March 2013

Exhibit 1: Trends in WPI Inflation (%, yoy)

Weightage (%) Headline Inflation Primary Articles Fuel and Power Manufactured Products 100 20.12 14.91 64.97 Mar-13 6.0 7.6 10.2 4.1 Feb-13 6.8 9.7 10.5 4.5 Jan-13 7.3 11.4 9.3 4.9 Mar-12 7.7 10.4 12.8 5.2 FY2013 7.3 9.8 10.5 5.4 FY2012 8.9 9.8 14.0 7.3

Source: Office of Economic Adviser, Angel Research

Exhibit 2: Breakup of components in Primary Articles (%, yoy)

Weightage in WPI Primary Articles 1. Food Articles A. Food Grains (Cereals + Pulses) A1. Cereals A2. Pulses B. Fruits & Vegetables B1. Vegetables B2. Fruits C. Milk D. Eggs, Meat & Fish E. Condiments & Spices F. Other Food Articles 2. Non-Food Articles 3. Minerals
Source: Office of Economic Adviser, Angel Research

Sep-12 9.2 8.1 17.3 14.4 29.0 0.1 (6.7) 7.0 6.5 13.2 (13.0) 18.6 10.4 13.9

Oct-12 7.8 6.7 17.1 16.3 19.9 (2.9) (9.1) 3.4 6.3 13.1 (18.3) 11.0 11.4 8.6

Nov-12 9.6 8.8 18.0 17.8 18.8 3.0 (1.5) 7.4 6.2 14.2 (17.6) 9.9 14.0 6.9

Dec-12 10.6 10.6 18.5 19.1 16.3 8.9 14.4 4.8 6.1 12.7 (11.7) 11.1 13.6 5.6

Jan-13 11.4 12.3 18.0 18.6 15.9 18.4 30.0 10.3 4.5 11.2 (3.7) 6.8 13.0 4.0

Feb-13 9.7 11.4 18.4 19.2 15.0 10.4 12.1 8.9 4.6 12.8 3.6 9.0 10.1 0.6

Mar-13 7.6 8.7 16.8 18.4 10.5 2.1 (0.9) 4.7 4.4 11.0 6.0 23.8 9.0 (0.4)

20.1 14.3 4.1 3.4 0.7 3.8 1.7 2.1 3.2 2.4 0.6 0.2 4.3 1.5

Exhibit 3: Moderation in headline WPI inflation

(%) 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 May-10 May-11 May-12 Mar-10 Mar-11 Mar-12 Nov-10 Nov-11 Nov-12 Mar-13 Jan-11 Jan-12 Sep-10 Sep-11 Sep-12 Jan-13 Jul-10 Jul-11 Jul-12 6.0 WPI Inflation

Source: Office of Economic Adviser, Angel Research

April 15, 2013

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WPI Inflation Update March 2013

Exhibit 4: Trends in components of WPI inflation

(%) 18.0 15.0 12.0 9.0 6.0 3.0 0.0 May-12 Mar-12 Nov-12 Mar-13 10.4 6.0 Mar-13 Oct-12 Jun-12 Jul-12 Aug-12 Dec-12 Apr-12 Feb-12 Sep-12 Feb-13 Feb-13 Jan-12 Jan-13 7.6 4.1 10.2 Primary Articles Fuel and Power Manufactured Products

Source: Office of Economic Adviser, Angel Research

Manufactured products weightage 65.0%

Manufactured products inflation moderated for the seventh straight month and decelerated to about a 40-month low. It came in at 4.1% as compared to 5.2% in March 2012. Inflation in manufactured food products stood at 7.0%, but it is the non-food manufactured component that has cooled down considerably owing to decline in commodity prices on a yoy basis and weak pricing power. Core inflation, ie the non-food manufacturing component of inflation, softened further to 3.4% as compared to 3.8% in the previous month and 5.0% in March 2012.

Exhibit 5: Wedge between WPI and CPI inflation

(%) 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 May-12 Mar-12 Aug-12 Oct-12 Jun-12 Apr-12 Jul-12 Nov-12 Sep-12 Dec-12 Jan-13 WPI Inflation CPI inflation

Source: RBI, Angel Research

April 15, 2013

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WPI Inflation Update March 2013

Policy Outlook
Despite the widening of the current account deficit, which has likely peaked at 6.7% of GDP in FY2013, we see scope for policy easing by the RBI in its annual monetary policy owing to the moderating trend in WPI inflation and the recent easing in CPI inflation. Growth for FY2013 is likely to decelerate to a decade-low of 5.0%. In addition, industrial production remains weak, posting a growth of 0.9% over April February of FY2013. The RBIs monetary policy stance has veered towards supporting growth; nonetheless its guidance remains hawkish. So far in CY2013, it has cut the policy rate by 50bp but monetary transmission has been limited due to the wedge between credit-deposit growth. We expect the RBI to cut the repo rate by 25bp on May 3, 2013.

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WPI Inflation Update March 2013

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WPI Inflation Update March 2013

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