WPI inflation: Rupee limits RBI's rate action, says ARathi
Brokerage house AnandRathi has come out with its report on economy. The research firm expects WPI inflation to ease to 5.2 percent, significantly lower than inflation in the past three years. The sharp fall in the rupee may contribute to a pickup in imported inflation.
July 15, 2013 / 18:23 IST
AnandRathi's report on economy
A sharp jump in prices of food articles led to marginal pick up in the WPI inflation in Jun'13. However, impact of a 10 percent fall in rupee is yet to be factored in WPI inflation in coming months. Nevertheless, due to weak pricing power of the manufactures, the impact of rupee depreciation is likely to be ~30-50bps on the overall WPI inflation. We expect RBI to maintain status quo in the Jul'13 policy.WPI inflation marginally up: In line with our expectations, WPI inflation inched up to 4.9 percent from 4.7 percent in May'13. WPI inflation for Apr'13 was revised downward by 12bps to 4.8 percent, from 4.9 percent earlier. This was mainly on account of 21.6 percent downward revision in non-coking coal prices. Interestingly, this is the third downward revision in 3.5 years; otherwise, 95 percent of the times WPI has faced upward revisions.Core inflation continues to soften: Despite a sharp fall in the rupee, non-food manufactured inflation in Jun'13 further eased to a 42-month low of 2 percent, down from 2.4 percent in May'13. This partly reflects a sharp reduction in pricing power of the manufacturers. Basic metals, running in deflation for past three months (-2.3 percent in Jun'13), remains the key contributor to softening of core inflation.Food inflation hardens: After softening to a 15-month low of 6.1 percent in Apr'13, inflation in food articles inched up to 9.7 percent in Jun'13. Reflecting this trend, the CPI inflation rose sharply to 9.9 percent in Jun'13 since food has a greater weight in the CPI.Inflation outlook: Food article prices rose sharply by 3 percent (mom) in Jun'13, as heavy rains led to supply disruptions. A normal monsoon this year is expected to lead to a good kharif crop. This would ease the pressure on food prices. The fall in global commodity prices would also help reduce imported inflation. However, a sharp fall in the rupee against the US dollar would counter any positive impact that India might have seen due to the fall in global commodity prices. Nevertheless, we expect WPI inflation to soften to ~4 percent by Sep'13, while core inflation could fall to ~1.5 percent. In FY14, we expect WPI inflation to ease to 5.2 percent, significantly lower than inflation in the past three years. The sharp fall in the rupee may contribute to a pickup in imported inflation. However, the full pass-though may not be possible due to weak domestic demand.Policy outlook: RBI has already frontloaded the monetary-easing policy with 125bps cut in the repo rate and 200bps cut in CRR since Jan'12. However, the high liquidity-deficit in the system has hindered the transmission of RBI's easing actions. In the Jul'13 policy, RBI has little room to reduce the repo rate further on account of a sharp depreciation of the rupee. We expect the RBI to focus on liquidity easing measures so that transmission of the earlier easing actions is possible. We expect ~50bps softening in lending rates in the next six months.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
Read More
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
