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Although Wholesale Price Index (WPI) inflation brought about some cheer in the market after weak IIP and auto sales numbers, the growth in food inflation number was a dampner.
The Wholesale Price Index (WPI) inflation for the month of June came in better than expected at 4.86 percent. Core inflation came in at 2 percent. Although the numbers brought about some cheer in the market after weak IIP and auto sales numbers, the growth in food inflation number was a dampener.
PMEAC chairman C Rangarajan said inflation appears to be stabilizing. But said although food articles have gone up but manufacturing inflation of the month has come down. He told CNBC-TV18 that food inflation can moderate in view of a good monsoon. He also sees manufacturing inflation getting impacted by the depreciation in rupee.
However an uncomfortable CPI number will not allow a rate cut announcement in RBI's July monetary policy.
Going forward, experts believe that WPI softening will continue. A Prasanna, Chief Economist, ICICI Securities Primary Dealership said that it is visible that there is no pricing power with manufacturers. "The incoming data on production suggests that demand is weakening. So, I would think it is very much possible that WPI trends further lower from here," he added.
While some are seeing fall in core inflation as a good news some consider it bad as it may discourage manufacturers from producing as prices have almost reached in deflationary territory.
Rangarajan said while lower core inflation is good, it may also be the loss of pricing power on the part of the manufacturers. "Going ahead I do not know whether this would be a major factor in terms of the performance of the industrial sector. I think the performance of the industrial sector will depend upon the level of investments, the expectations regarding that as well as the availability of critical inputs like coal, power and so on," he added.
Prasanna also believe that fall in core inflation should not be made a big issue as companies can still make money through productivity gains.
Rupee fall to reflect in July inflation
Most experts believe that going ahead manufacturing inflation will be affected by sharp depreciation in rupee. "The impact of the currency depreciation on fuel, on non-food primary articles, on minerals has still not shown through and the fact that crude continues to go up means in the next couple of months those components may surprise on the upside," Sajjid Chinoy of JPMorgan pointed.
Rangarajan also agreed that manufacturing inflation will be affected going forward due to tradable commodities like oil. Prasanna explained that the impact will mainly come on the industrial fuels like crude and petroleum products, which are freely priced.
He, however, does not see any big impact on manufacturing side as demand being weak, and producers lacking pricing power, they may be able to pass on higher prices.
Will RBI provide rate cut?
Since currency depreciation is not factored in June inflation, it will surely reflect in coming months impacting inflation leaving little room for RBI to ease monetary policy.
Indranil Pan, chief economist, Kotak Mahindra Bank believes that RBI may not provide any rate cut in July 30 monetary policy as well as CPI continues to remain high. "For the RBI the CPI is becoming as much or even more important than the WPI movement and they have made that statement quite a few times. Therefore out of the softer WPI and core, I would definitely not want to change my call in terms of the repo rate," he added.
Rangarajan believes that in next policy external sector considerations will weigh more on RBI's stance.
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