WPI Inflation Update | Economy

October 15, 2012

WPI Inflation Update Sept 2012

WPI inflation expectedly rises to 7.81%
Key highlights
Wholesale Price Index (WPI) inflation for the month of September 2012 surged to a tenmonth high, remaining sticky above the 7% level despite a high base. Inflation expectedly inched up to 7.81% during September 2012 as compared to 7.55% in August 2012 and 10.0% in September 2011. On a month-on-month (mom) basis, headline WPI inflation grew at a steep pace of 1.1% in September as compared to 0.48% during August 2012. The rise in headline inflation is primarily driven by fuel inflation on account of the hike in fuel prices. Inflation for the month of July 2012 has been revised upwards significantly to 7.52% as compared to provisional estimate of 6.87% due to revision in electricity tariff which led fuel and power inflation to increase to 8.32% as compared to 5.98% reported earlier.

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

Trends in Inflation for the month of September 2012:

Primary Articles inflation eased to 8.77% in September 2012 as compared to 10.08% during August 2012. Inflation in food articles moderated for the third straight month to 7.86% as compared to 9.14% in the previous month. Inflation in Food Grains increased to 17.2% vis--vis 15.09% in the previous month continuing its increasing trend since the past seven months. On the other hand, prices of Fruits and Vegetables decelerated to 0.05% during the month as compared to 5.38% in August 2012 due to a sharp 6.78% decline in vegetable prices as compared to a rise of 9.98% in August 2012. During the month, inflation in Non-Food Articles moderated to 10.0% from 13.75% in the previous month while inflation in Minerals increased to 12.38% from 9.74%. Fuel and Power inflation surged to 11.88% in September 2012 from 8.32% in the previous month reflecting the impact of hike in fuel price to some extent. The passthrough impact of rise in fuel inflation into generalized inflation is likely to come into effect with a lag. Inflation in Manufactured Products, having the highest weightage in the WPI, rose to 6.26% during the month as compared to 6.14% in August 2012 and 8.0% in the corresponding period of the previous year. The major reason for this increase can be attributed to a rise in inflation in Manufactured Food Products that witnessed a rise in inflation to 9.76% during the month vis--vis 9.01% in August 2012 and 8.05% in the corresponding period of the previous year.

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WPI Inflation Update September 2012

Exhibit 1: Growth in inflation (%, yoy)

Weightage (%) Headline Inflation Primary Articles Fuel and Power Manufactured Products
Source: Office of Economic Adviser, Angel Research

Sep-12 7.81 8.77 11.88 6.26

Aug-12 7.55 10.08 8.32 6.14

Jul-12 7.52 10.54 8.39 5.87

Sep-11 10.00 12.22 14.02 8.00

100 20.12 14.91 64.97

Exhibit 2: Growth in headline inflation

(%) 12 11 10 9 8 7 6 5 4 Nov-11 Feb-12 Apr-12 May-12 Jun-12 Jul-12 Mar-12 Aug-12 Dec-11 Sep-12 Oct-11 Jan-12 9.9 9.5 7.7 6.9 7.4 7.7 7.5 7.5 7.6 7.5 7.6 7.8

Exhibit 3: Trends in Major Categories

(%) 18 16 14 12 10 8 6 4 2 0 Feb-12 May-12 Jun-12 Nov-11 Mar-12 Aug-12 Oct-11 Dec-11 Jan-12 Apr-12 Jul-12 Sep-12 Primary Articles Fuel and Power Manufactured Products

Source: Office of Economic Adviser, Angel Research

Source: Office of Economic Adviser, Angel Research

Policy Outlook
The initial impact of hike in fuel prices is clearly evident in the inflation numbers for the month and going ahead, upside risks to inflation are expected to persist on account of cascading impact of fuel prices on overall inflation. We believe that the Reserve Bank of India (RBI) is factoring in this impact since it has been urging the government to take measures towards de-regulating fuel prices. On a positive note, inflation in Manufactured Products, on a m-o-m basis, increased by merely 0.54% (and 0.07% on a m-o-m annualized basis) indicating that demand-side pressures are in check. Also, core inflation witnessed stability during the month at around 5.5%. In our view, in light of the overall high headline inflation, it would be difficult for the RBI to have a meaningful change in stance towards being dovish. The recent reforms by the government have been cited as grounds for the RBI to cut rates in the upcoming policy. While we do not rule out the possibility of such a cut, we do believe that for the fiscal year as a whole rate cuts are unlikely to be more than 25 50bps. We believe that the RBIs tone is likely to be largely hawkish and its vigilance on inflation is likely to continue in the near-term.

October 15, 2012

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WPI Inflation Update September 2012

Research Team Tel: 022 - 39357800

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October 15, 2012

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WPI Inflation Update September 2012

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October 15, 2012

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