WPI declines to 6%; expect 25bps rate cut: Emkay

Emkay Global Financial Services has come out with its report on WPI inflation update for March 2013. The research firm believes, current macroeconomic scenario demands greater focus on spurring growth and some space remains for monetary easing and expects a 25bps rate cut on May 3rd.

WPI at sub-6 percent; robust base supports fall in headline

Mar'13 WPI inflation came in at 5.96 percentYoY v/s 6.84 percent in Feb'13. Despite a 0.2 percentMoM rise in index a higher base effect pulled down the headline WPI rate. In headline terms, inflation levels are the lowest seen since Dec'09. The average WPI inflation seen during FY13 stands at 7.4 percent vs 9 percent in FY12.

The YoY inflation for primary articles, fuel & power and manufactured products stood at 7.6 percent, 10.2 percent and 4.1 percent respectively. The three segments witnessed a MoM rise. The revised inflation for Jan'13 stood sharply higher at 7.3 percent vs 6.6 percent provisional with all three segment indices marking an upward revision. The upward revision is the sharpest seen for FY13.

Rise in non-food articles' and fuel prices in the backdrop of lower manufactured products inflation are symptomatic of weakening pricing power. The rise in fuel and power index is in contrast to the fall in global crude oil price. A favorable base aided lower manufactured products inflation despite a 0.1 percentMoM rise in index. The core inflation (manufactured products ex-food) at 3.5 percent comforts RBI with regards to its policy decision. The favorable base effect will retain core inflation at around 3 percent for a couple of months ahead.

Outlook: 25bps rate cut likely

Slowdown in output, decline in demand, narrower trade deficit in wake of lower imports and muted demand-pull price pressures are to some extent an outcome of fiscal tightening via curtailed Government expenditure during Q4FY13.

Thus, several macro variables remain conducive for rate easing, viz. low growth, muted production, slowing investments and consumption, decline in headline WPI and core inflation, recent correction in commodity prices and improvement in trade deficit seen for Feb'13.

However, monetary space remains limited in the backdrop of uncertain external balances, high CAD and double digit CPI. Global risk off can impact capital flows making the INR vulnerable leading to upside risks to CAD. The tight systemic liquidity too can dilute easy monetary transmission.

However, we believe current macroeconomic scenario demands greater focus on spurring growth. We believe some space remains for monetary easing and expect a 25bps rate cut on May 3rd.

Going ahead, sustenance of easy monetary policy would hinge upon a) continuation of credible fiscal tightness ahead of an election year b) stability of INR amidst forex and capital flows into the economy and c) sustenance of soft commodity prices.

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