WPI Inflation, May 2013 | Wholesale Price Index | Core Inflation

WPI Inflation Update | Economy

June 14, 2013

WPI Inflation Update – May 2013
Inflation continues to tread positively
Key highlights

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

The Wholesale Price Index (WPI) based inflation moderated for the fourth straight month in May 2013 to 4.70% as compared to 4.89% in the previous month and 7.55% in May 2012. Owing to benign commodity prices as well as a break-down of pricing power in manufacturing, headline WPI inflation is now within the 5% comfort zone for the second consecutive month, since its spike post Nov 2009. The moderation is led by core inflation which eased for the ninth straight month to 2.4% 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 to 5.7% from 6.0%, mainly owing to a 242bp revision in fuel inflation. Despite the considerable moderation in WPI inflation, we believe that the Reserve Bank of India (RBI) is unlikely to ease policy rates in its upcoming policy meeting on June 17, 2013. We believe that the RBI is likely to be cautious since the sharp INR depreciation could potentially compound the trade deficit in the near term and also offset the positive impact of benign global commodity prices on inflation. Further, inflation at the retail level, measured by the Consumer Price Index (CPI), continues to remain elevated (9.3% in May 2013).

Trends in Inflation for May 2013
Primary articles – weightage 20.1%
Inflation in primary articles (on a moderating trend since the past three months) inched higher to 6.7% in May 2013 as compared to 5.8% in the previous month. This can be attributed to higher inflation in primary food articles, even as non-food articles and minerals 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. In case of food articles, the marginal rise in cereal inflation to 16.0% from 15.6% in April 2013 was more than offset by moderation in pulses inflation to 5.9% from 10.3% in the previous month.

Fuel and power – weightage 14.9%
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 with electricity 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 of 4.70% as compared to a contribution of 33bp in the previous eight months. The increase in the electricity index was offset by the decline in coal index as well as moderation in mineral oils. Going ahead, the revision in coal price index is likely to keep the fuel index from inching downwards.

Please refer to important disclosures at the end of this report

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WPI Inflation Update – May 2013

Exhibit 1: Trends in WPI Inflation (%, yoy)
Weightage (%) Headline Inflation Primary Articles Fuel and Power Manufactured Products
Source: Office of Economic Adviser, Angel Research

May-13 4.7 6.7 7.3 3.1

Apr-13 4.9 5.8 8.8 3.4

Mar-13 5.7 7.4 7.8 4.3

May-12 7.5 10.3 11.5 5.2

100 20.12 14.91 64.97

Exhibit 2: Manufactured products inflation trending down
(%) 15.0 12.0 9.0 6.0 3.0 0.0 Aug-12 Oct-12 Mar-13 May-12 Apr-13 May-13 Nov-12 Jun-12 Jul-12 Sep-12 Dec-12 Jan-13 Feb-13 Primary Articles Fuel and Power Manufactured Products

7.3 6.7 3.1

Source: Office of Economic Adviser, Angel Research

Exhibit 3: Spike in food articles inflation during May 2013
(%) 15.0 12.0 9.0 6.0 3.0 0.0 -3.0 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Source: Office of Economic Adviser, Angel Research Primary Articles (wt: 20.1%) Non-Food Articles (wt: 4.3%) Food Articles (wt: 14.3%) Minerals (wt: 1.5%)

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WPI Inflation Update – May 2013

Manufactured products – weightage 65.0%
Inflation in manufactured products decelerated for the eighth straight month to 3.1% in May 2013 as compared to 3.4% in April 2013 and 5.2% in the corresponding period of the previous year. Core inflation, ie the non-food manufacturing component of inflation, softened to a 41-month-low to 2.4% as compared to 5.2% in May 2012. The deceleration in core inflation can be attributed to decline in commodity prices on a yoy basis as well as continued weakness in pricing power.

Exhibit 4: Moderation in core inflation within 3%-level
(%) 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Mar-11 May-11 Mar-12 May-12 Mar-13 Jul-11 Sep-11 Nov-11 Jul-12 Sep-12 Nov-12 Jan-11 Jan-12 Jan-13 Core Inflation CRB commodity index (RHS) (Index) 400 380 360 340 320 300 280 260 240 220 200 May-13

Source: Office of Economic Adviser, Angel Research

Policy Outlook
Despite the considerable moderation in WPI inflation, we believe that the RBI is unlikely to ease policy rates in its policy meeting on June 17, 2013. We believe that the RBI is likely to be cautious since the sharp INR depreciation could potentially compound the trade deficit in the near term and also offset the positive impact of benign global commodity prices on inflation. In fact we believe that INR depreciation and its stabilization at a higher level could stoke imported inflation and the RBI is likely to guard against those inflationary pressures. Further, despite the substantial moderation in WPI inflation, inflation at the retail level, as measured by the CPI, continues to remain elevated. CPI inflation came in slightly lower at 9.3% in May 2013 as compared to 9.4% in April 2013 owing to food inflation remaining above double-digits.

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WPI Inflation Update – May 2013

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WPI Inflation Update – May 2013

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