Expect WPI Inflation to average 6.5-7% in FY13: ICRA

ICRA has come out with its report on Wholesale Price Index (WPI) March 2012. According to the research firm, RBI is expected to reduce the repo rate by 25 basis points (bps) in the upcoming policy review.

Headline inflation eased to 6.89% in March 2012 from 6.95% in February 2012, as moderating inflation related to non food manufactured products (“core inflation”; 4.7% in March 2012; 5.7% in Feb 2012) and fuel & power items (10.4% in March 2012; 12.8% in Feb 2012) was largely offset by higher primary inflation (9.6% in March 2012; 6.3% in Feb 2012).

The decline in core inflation (to 4.7% in March 2012 from 5.7% in Feb 2012) in year-on-year (y-o-y) terms was broad-based and partly reflected a favourable base effect; core inflation stood at a seven-year high of 8.5% in March 2011, based on comparable data available from the current series of the wholesale price index (WPI). Nevertheless, the non-food manufactured products index rose by a slower-than-expected 0.4% in month-on-month (m-o-m) terms in March 2012.

Inflation related to primary food items rose sharply (to 9.9% in March 2012 from 6.1% in Feb 2012), reflecting a considerable increase in vegetable prices (30.6% in March 2012 in y-o-y terms and 16.4% in m-o-m terms). Notwithstanding some deceleration, inflation related to non-vegetarian protein products remained high (17.7% in March 2012, 20.0% in Feb 2012).

Similar to the trend in Feb 2012 (-2.6%), inflation for primary non-food items was negative in March 2012 (-1.2%), led by the sharp 31.4% decline in prices of fibres in y-o-y terms in March 2012. However, y-o-y inflation related to oilseeds rose to 12.8% in March 2012 from 9.4% in Feb 2012.

Mineral inflation continued to rise (to 28.6% in March 2012 from 25.3% in Feb 2012), led primarily by copper ore (49.8% in March 2012, 21.2% in Feb 2012).

Inflation for Jan 2012 was revised to 6.9% from 6.6%, largely on account of minerals (to 30.7% from 24.8%) and non-food manufactured products (to 7.0% from 6.7%).

Outlook

Inflation is expected to average 6.5%-7.0% in FY13. Factors likely to exert pressure on inflation include a revision in electricity tariffs announced in several States; some revision in domestic prices of various fuel items and coal; and higher rates of excise duty. A rise in commodity prices and a weakening of the Indian rupee remain significant risk factors for the inflation trajectory. However, with core inflation likely to remain between 5.0-6.0% in H1FY13 and industrial growth posting a dismal 1.7% since October 2011, the RBI is expected to reduce the repo rate by 25 basis points (bps) in the upcoming policy review.

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