Primary, fuel inflation drives inflation further to 7.55%
Emkay Global Financial Services has come out with its report on inflation.
June 14, 2012 / 18:10 IST
Emkay Global Financial Services has come out with its report on inflation.
Primary and fuel inflation drive overall inflation to 7.55% WPI inflation for the May'2012 stood at 7.55% vs our and consensus expectations of 7.4%. March'2012 inflation has been revised up to 7.7% from 6.9% provisional. The 7.55% reading for May`12 compares against 7.23% in April`12 and 9.56% a year back. On a m-o-m basis, inflation is up 0.5% vs 1.3% in Apr'12. Primary / fuel inflation at 10.9% / 11.5% respectively continue to remain sticky for consecutive second month and drag the overall inflation. Manufacturing sector inflation has eased to 5.0% vs 5.1% in Apr and has been decelerating since Jan 2012 at 6.7%. Core inflation i.e Manufacturing ex food has come down below 5% at 4.8% and has remained sub-5% for the past three months.Non-food primary inflation continue to rise; Mineral prices down momNon food primary inflation continues to rise with May inflation rising further to 11.2%yoy as against 8.1% in previous month. However on mom basis it increased by a lower 0.4% as against an average of 2.2% in the previous five months. Within primary non-food articles, while fibre prices continued to decline, prices of oil seeds/ Mineral/ Crude petroleum continue to remain higher on yoy basis at 19.2%/ 15.6%/ 19.2% respectively. On mom basis Mineral prices came down by 1.4% led by copper ore (-2.6%), Zinc Concentrate (-1% mom), Iron ore (-3% mom), Barytes (-5.3% mom) and crude petroleum (-0.6%) Rise in petrol prices drive fuel inflationThe rise in fuel inflation to 11.5% yoy (1.0% m-o-m) was primarily on back of recent petrol price hike. While Petrol index rose by 2.92%mom in may 2012, bitumen prices also increased by 2.1%mom. Our analysis show (recent report Macrotracks released on 4th June,12) that under various assumptions of price hikes in fuel sectors, the WPI inflation could rise by 170bps as a first round impact and inclusive of the pass-through the impact could be 220bps. For FY13 we project average inflation at 6.4%, with an upside risk in H1FY13.Pass-through coefficient seen modest rise but pricing power still lowWhile manufactured product (ex-food) inflation came down slightly to 4.8% YoY (vs 4.9% in Apr), excluding gold and silver it was even lower at 4.4%. This indicates that a significant part of the manufactured-ex food inflation was caused by rise in bullion prices. The pass-through coefficient (12 month elasticity of core inflation ex-food, gold & silver w.r.t. primary non-food inflation) has seen consistent rise over the last six months to 0.15 in May 2012 from -0.07in Sept 2011. Overall the modest rise in the pass through coefficient indicates receding margin pressures. But our preliminary review of Q4FY12 results for manufacturing sector indicates continued contraction for five quarters in a row. This signifies sustained weakening in pricing power. CRR cut and OMO’s more likely than Repo rate cutPrimary and fuel inflation drive overall inflation to 7.55% While core-inflation has remained at RBI's comfort zone of sub-5% for consecutive three months, we continue to believe that the effective key tool for the RBI to tackle the growth slowdown (Q4FY12 GDP at 5.3%, April'12 IIP at dismal 0.1%) will be OMO’s and cuts in CRR rather than a repo rate cut. The rate cut even if done in an environment of steep liquidity deficit (1.4% of NDTL) will not have meaningful bearing on the borrowing costs. Q1 is a lean credit period and hence the deficit may eventually rise to higher levels in coming quarters. Hence, we believe that even if rate cut is done in forthcoming mid-quarter review, as we progress towards the H2FY13, its impact on the interest rates will fade away. We also remain wary of 80bps upwards revision in Mar'12 inflation at 7.7% (6.9% earlier). We thereby attribute a 80% probability of a 50bps CRR cut and 20% probability for a 25bps repo rate cut. 
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