Inflation at 3yr low; expect 25bps rate cut in March: Angel

Angel Broking has come out with its report on "Wholesale Price Index (WPI) inflation for January 2013". According to the research firm, a 25bps
rate cut is expected in the March or April policy, maintaining view of a 50-bp rate cut for the rest of CY2013.

WPI inflation for January 2013 positively moderated for the fourth straight month and slipped below 7.0% for the first time since December 2009, marking a three-year low.

Headline WPI inflation stood at 6.6% yoy in January 2013 as compared to 7.2% yoy in the previous month as well as in January 2012.

On a 3MMA basis, headline WPI inflation eased to 7.0% yoy as compared to 7.3% yoy in November 2012.

Core inflation receded for the fifth straight month to 4.1% yoy as compared to 4.2% yoy in the previous month and 7.0% yoy in the corresponding period of the previous year.

Although inflation in primary articles moderated slightly to 10.3% yoy from 10.6% in the previous month, it still remains elevated at double digits. Amongst this category, inflation in food articles inched slightly higher to 11.9% yoy as compared to 11.2% yoy in December 2012 and a 0.7% yoy contraction in January 2012. This can be mainly attributed to the 16.7% yoy rise in fruits and vegetables inflation owing to a low base (it declined by 0.3% mom) as compared to 13.2% in the previous month and a decline of 22.2% in January 2012.

Non-food articles’ inflation moderated to 10.5% yoy as compared to 13.2% yoy increase in the previous month while inflation in Minerals reported the slowest pace of growth in over three years at 2.1% yoy as compared to 3.7% in the previous month.

Fuel and power inflation moderated for the fourth straight month to 7.1% yoy as compared to almost double-digit growth since the past three years, mainly owing to inflation in coal remaining flat and a slight deceleration in mineral oil such as ATF, naptha, furnace oil, etc. On a 3MMA basis, the momentum of inflation in fuel and power weakened as it reported an 8.8% yoy rise.

Policy Outlook

We believe that in light of the weakness in industrial production and CSO’s modest projections for FY2013 of 5.0% real GDP growth and 1.9% manufacturing sector growth and the positive inflationary trend, the RBI’s monetary policy stance is likely to be more growth-supportive going forward.

However, we believe that the RBI is unlikely to adopt aggressive policy easing since risk factors continue to persist owing to 1) food inflation at double-digits keeping CPI inflation elevated, 2) the release of suppressed inflation in the economy, through hike in diesel prices, railway fares etc (though fiscally prudent), is likely to be inflationary in the near-term, 3) expectations of current account deficit (CAD) at a record-high level of almost 5.0% of GDP for FY2013. We believe a high CAD would be a key factor limiting headroom for the RBI to cut rates since it could stoke demand for imports further and also lead to higher imported inflation. At the same time, attracting capital flows is imperative to finance the current account deficit and lower interest rates could discourage capital flows, particularly debt inflows to finance the CAD.

In our view, the RBI’s policy stance is also likely to be influenced by the headline fiscal deficit number for FY2013 in the forthcoming budget and the deficit target for FY2014 along with the roadmap to narrow the fiscal deficit. We expect a 25bp rate cut in the March or April policy, maintaining our view of a 50-bp rate cut for the rest of CY2013.

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

Read More