WPI Inflation | Economy

September 16, 2013

WPI Inflation – August 2013
WPI inflation at six-month high
Key highlights

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

The Wholesale Price Index (WPI) based inflation touched a six-month high at 6.10% for August 2013 as compared to 5.79% in the previous month and 8.01% in August 2012. Higher food and fuel inflation are seen to be the main drivers of the pick-up in inflation. Food inflation has come in at 18.18%, a 3-year high as compared to 11.9% in the previous month, owing mainly to rise in perishable items. Core (non-food, non-fuel) inflation eased to 2.0% from 2.3% in July 2013, and 5.8% in August 2012, continuing to reflect weak pricing power. Headline inflation for June 2013 has been revised higher by 30bp to 5.16% from 4.86% reported earlier followed by an upward revision across the major components. We believe that the Reserve Bank of India (RBI)’s upcoming monetary policy is expected to be influenced by the outcome of Federal Reserve (Fed)’s FOMC meeting and its subsequent impact on domestic capital flows and exchange rate movements.

Trends in Inflation for August 2013
Primary articles – weightage 20.1%
Primary articles inflation has inched up to 11.72% in August 2013 as compared to 8.99% in July 2013 and 11.23% in the corresponding period of the previous year. This can be attributed to the rise in food inflation which came in at 18.2%, a 3-year high as compared to 11.9% in the previous month. The rise in prices of perishables like vegetables & fruits and eggs, meat & fish has put pressure on food inflation. Put together, these items alone contributed more than 250bp to the headline 6.10% inflation. In particular inflation in vegetables has come in at 77.81% as against 10.08% in August 2012. Amongst food grains, inflation in cereals remained high at 14.35% as compared to 17.17% in July 2013 while pulses remained in deflation territory for the second consecutive month declining by 14.40%, aided by a high base. Other constituents of primary articles, ie non-food articles, witnessed deceleration in inflation during August 2013 to 1.06% from 5.51% in the previous month while minerals remained in deflationary territory and declined by 7.21% as compared to 2.38% in July 2013.

Exhibit 1: Trends in WPI Inflation (%, yoy)
Headline Inflation Primary Articles of which: Food Fuel and Power Manufactured Products Weightage (%) 100 20.12 14.34 14.91 64.97 Aug-13 6.10 11.72 18.18 11.34 1.90 Jul-13 5.79 8.99 11.91 11.31 2.81 Jun-13 5.16 8.79 10.27 7.51 2.89 Aug-12 8.01 11.23 9.34 8.74 6.36

Source: Office of Economic Adviser, Angel Research

Please refer to important disclosures at the end of this report

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WPI Inflation – August 2013

Exhibit 1: Pick-up in inflation led by primary articles and fuel index
(%) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 May-12 May-13 Mar-13 Aug-12 Oct-12 Nov-12 Aug-13 18.18 1.06 Feb-12 Feb-13 May-12 May-13 Mar-12 Mar-13 Jan-13 Jun-13 Jan-12 Oct-12 Jun-12 Jul-12 Apr-13 Jul-13 Aug-12 Nov-12 Aug-13 Apr-12 Sep-12 Dec-12 Apr-12 Feb-13 Apr-13 Jan-13 Jun-12 Sep-12 Jun-13 Jul-12 Dec-12 Jul-13 1.9 Primary Articles Fuel and Power Manufactured Products 11.7 11.3

Source: Office of Economic Adviser, Angel Research

Exhibit 2: Food inflation pushing up the trajectory of primary articles
(%) 20.0 15.0 10.0 5.0 (5.0) Food Inflation Non-food Primary Articles

Source: Office of Economic Adviser, Angel Research

Fuel and power – weightage 14.9%
Inflation in fuel and power picked up for the fourth straight month reflecting higher petrol, diesel and ATF prices. The overall fuel and power index witnessed double-digit inflation at 11.34% as compared to 11.31% in the previous month and 8.74% in August 2012. The mineral oils index surged to 15.81% in August 2013 from 5.62% in the corresponding period of the previous year, similar to 16.01% in July 2013, owing mainly to rise in prices of administered fuels like diesel and LPG. The rise in international oil prices has made India’s basket of crude dearer. Further we believe that the expected increase in domestic diesel prices to reduce under-recoveries on fuel is likely to push up the fuel index further in the near-term. The release of suppressed inflation is also likely to impact overall headline inflation through second-round effects.

September 16, 2013

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WPI Inflation – August 2013

Manufactured products – weightage 65.0%
Manufactured articles inflation came in at a muted 1.90% in August 2013, almost a 4-year low. It compares with 2.81% in July 2013 and 6.36% in the corresponding period of the previous year. Manufactured food inflation decelerated for the sixth straight month and eased sharply to 1.70% from 5.04% in July 2013. Core (non-food, non-fuel) inflation also eased to 2.0% from 2.3% during July 2013 and 5.8% in August 2012 as it continues to reflect weak pricing power.

Policy Guidance
As far as the RBI’s monetary policy is concerned, we know that macro-stability has taken precedence over growth considerations. In this context, we believe that the outcome of the U.S Fed’s FOMC meeting on September 17-18 and its subsequent impact on domestic capital flows and exchange rate movements are likely to be important determinants for domestic monetary policy action.

September 16, 2013

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WPI Inflation – August 2013

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September 16, 2013

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WPI Inflation – August 2013

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