Expect more rate cuts to strengthen investment cycle: CARE

CARE Ratings has come out with its report on "Wholesale Price Index (WPI) inflation for January 2013". According to the rating agency, the annual rate of inflation, based on monthly WPI, stood at 6.6% for the month of January, 2013 (over January, 2012) compared with 7.2% (Provisional) for the previous month and 7.2% during the corresponding month of the previous year. Build up inflation in the financial year so far was 5.1% compared with a build-up of 6.2% in the corresponding period of the previous year.

The inflation numbers have moderated significantly with figure coming down from 8.0% in August 2012 to 7.2% in December 2012 and further down to 6.6% in January 2013. Food prices have kept headline inflation high while core inflation i.e. manufactured products have extended the downward trend. The continuing softening trend in WPI inflation in recent months could further open space for monetary easing by the Reserve Bank of India in order to further support the sluggish growth in the country though the CPI inflation numbers released a couple of day back continue to be high. Pressures on the side of food articles continue, as inflation in this segment moved from 11.2% in December 2012 to 11.9% in January 2013. Inflation in primary food articles segment is largely a result of severe supply-side bottlenecks and institutional pricing constraints. The severe winter in the northern food producing states of the country have affected supplies of certain crops. Hence, the unfavourable weather conditions have resulted in shortfalls in several crops especially in the groups of vegetables, cereals, pulses and oilseeds which have contributed significantly to increase in prices. The significant aspect here is the increase in prices of oilseeds which is a fallout of lower kharif output as well as possibly lower output of mustard, the principal rabi crop. Fuel and power category, inflation moderated to 7.1 % during the month from 17.0% in January 2012. Diesel prices however showed a high increase, and would be expected to display such tendencies going ahead given the decision to adjust prices on a monthly basis. The indirect impact through higher cost of other goods due to an increase in freight charges would be felt over a period of time. Also, the relief in inflation in the manufactured products segment has registered moderation, moving down to 4.8% since September 2012. This is mainly attributed to softening of global commodity prices due to prevailing weak demand conditions. Subsequently, the declining pricing power of the manufacturers has prevented the transmission of any hike in the prices of manufactured products. Monthly trends demonstrate that in case of primary articles mainly prices of food articles have registered higher inflation in January 2013, when compared with previous months. Fuel and Power and Manufactured products inflation has consistently moderated over the last three months. CPI
Retail inflation in January rose for the fourth consecutive month. It remained in double digits at 10.8% as against 10.6% in December 2012. The rise in CPI was driven mainly by higher prices of vegetables (26.1%), edible oil and fats (15.0%), cereals (14.9%) and protein based products like meat, fish and eggs (13.7%). It was observed that the retail inflation stood highest among the BRICS group of emerging economies. Despite, being the largest producer of fruits and vegetables the country is unable to meet its rising demand. The per capita availability of cereals has been declining in the country. Considering the food inflation, prices of food items are unlikely to come down anytime soon as no great pick up has been observed from the supply side so far. Hence, immediate measures are required to be initiated on the distribution side. Monetary policy action
WPI inflation numbers have so far significantly moderated with the figure coming down from September 2012 to December 2012 and further down to 6.6% in January 2013, while the retail inflation continues to move up to 10.8% in January 2013. CPI inflation is expected to remain at higher levels as pressures from of food side are not expected to ease anytime soon. Thus, rising food inflation seems to be a major concern for RBI to make further decisions. However, moderating WPI inflation although above the RBIs comfort zone of 4-5% and major contraction in IIP numbers simultaneously has raised hopes from Reserve Bank to further reduce lending rates in its next mid quarter monetary policy review. The rising CPI inflation number is of course still a major issue for the RBI. At present considering the sluggish growth in the country, the RBI is expected to further initiate steps to infuse liquidity into the system in order to revive growth, with OMOs already being announced. Hence, further rate cuts may be expected to strengthen the investment cycle if the WPI trend continues, though a clearer picture will emerge after the Union Budget is presented and the borrowing programme for the year known. 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. To read the full report click on the attachment

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