Please refer to important disclosures at the end of this report
The Wholesale Price Index (WPI) based inflation moderated for the fourth straightmonth in May 2013 to 4.70% as compared to 4.89% in the previous month and7.55% in May 2012.
Owing to benign commodity prices as well as a break-down of pricing power inmanufacturing, headline WPI inflation is now within the 5% comfort zone for thesecond consecutive month, since its spike post Nov 2009.
The moderation is led by core inflation which eased for the ninth straight month to2.4% as compared to 2.7% in the previous month and 5.2% in May 2012.
Headline inflation for March 2013 has been positively revised down by 31bp to5.7% from 6.0%, mainly owing to a 242bp revision in fuel inflation.
Despite the considerable moderation in WPI inflation, we believe that the ReserveBank of India (RBI) is unlikely to ease policy rates in its upcoming policy meetingon June 17, 2013.
We believe that the RBI is likely to be cautious since the sharp INR depreciationcould potentially compound the trade deficit in the near term and also offset thepositive impact of benign global commodity prices on inflation. Further, inflationat the retail level, measured by the Consumer Price Index (CPI), continues toremain elevated (9.3% in May 2013).
Trends in Inflation for May 2013
Inflation in primary articles (on a moderating trend since the past three months) inchedhigher to 6.7% in May 2013 as compared to 5.8% in the previous month. This can beattributed to higher inflation in primary food articles, even as non-food articles andminerals moderated sequentially. Food inflation is mainly led by the 4.9% yoy (9.0%mom) rise in vegetables inflation against a 9.0% decline in the previous month. Incase of food articles, the marginal rise in cereal inflation to 16.0% from 15.6% in April2013 was more than offset by moderation in pulses inflation to 5.9% from 10.3% inthe previous month.
Fuel and power
Inflation in fuel and power moderated to 7.3% during the month as compared to 8.8%in April 2013 and 11.5% in May 2012. The electricity index has gone up in line withelectricity tariff revisions by some states, pushing up inflation in this category to 27.9%as against 13.2% in April 2013. It contributed 69bp to the overall headline inflation of4.70% as compared to a contribution of 33bp in the previous eight months. Theincrease in the electricity index was offset by the decline in coal index as well asmoderation in mineral oils. Going ahead, the revision in coal price index is likely tokeep the fuel index from inching downwards.
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