WPI Inflation | Economy

August 14, 2013

WPI Inflation July 2013

WPI inflation surprises negatively
Key highlights

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

The Wholesale Price Index (WPI) based inflation for July 2013 came in at 5.79% as compared to 4.86% in the previous month and 7.52% in July 2012. The headline print for July 2013 surprised negatively by coming in much higher than market expectations of 5.0%, thus breaching the sub-5% level witnessed in the three preceding months. On a sequential basis, the pick-up can be seen across the broad components primary articles, fuel & power and manufactured products. The uptick can be attributed to factors such as rise in vegetable and fuel prices and the pass through impact of INR depreciation. Core (non-food, non-fuel) inflation inched up to 2.3% from 2.1% in June 2013, reflecting the impact of imported inflation. Headline inflation for May 2013 has been revised lower by 11bp to 4.58% from 4.69% reported earlier owing to a downward revision in primary articles inflation. We believe that the recent inflation readings suggesting pass through of INR depreciation into WPI inflation and still-elevated Consumer Price Index (CPI) inflation at 9.6% are likely to limit flexibility in the policy stance in the near-term.

Trends in Inflation for June 2013

Primary articles weightage 20.1%
Higher vegetable prices pushed up inflation in primary articles to 8.99% during July 2013 as compared to 8.14% in the previous month. Vegetable inflation accelerated by 46.6% as components such as onions and ginger reported a rise of 145% and 275% respectively. Despite their miniscule weightage, these two items contributed by 33bp to the 5.8% headline number. This pushed up food inflation to 11.91% as compared to 9.74% in the previous month and 10.17% in July 2012 despite a decline in inflation for pulses and fruits.

Exhibit 1: Trends in WPI Inflation (%, yoy)

Weightage (%) Headline Inflation Primary Articles Fuel and Power Manufactured Products 100 20.12 14.91 64.97 Jul-13 5.79 8.99 11.31 2.81 Jun-13 4.86 8.14 7.12 2.75 May-13 4.58 5.72 7.27 3.25 Jul-12 7.52 10.54 8.39 5.87

Source: Office of Economic Adviser, Angel Research

Please refer to important disclosures at the end of this report

WPI Inflation July 2013

Exhibit 1: Trends in Primary Articles Inflation (%, yoy)

Weight Primary Articles I. Food Articles A. Food Grains(Cereals and Pulses) Cereals Pulses B. Fruits & Vegetables Vegetables Fruits C. Milk D. Eggs, Meat & Fish E. Condiments & Spices F. Other Food Articles II. Non-Food Articles III. Minerals
Source: Office of Economic Adviser, Angel Research

Jan-13 11.4 12.3 18.0 18.6 15.9 18.4 30.0 10.3 4.5 11.2 (3.7) 6.8 13.0 4.0

Feb-13 10.5 12.0 17.7 18.6 14.0 14.5 19.9 10.2 4.5 12.4 2.7 8.5 10.7 2.8

Mar-13 7.4 8.6 16.4 17.9 10.8 2.2 (1.7) 5.7 4.4 11.4 3.7 20.2 9.3 (2.0)

Apr-13 5.1 6.1 14.6 15.5 10.5 (4.1) (8.9) 0.6 4.0 10.4 10.9 11.3 7.6 (4.5)

May-13 5.7 8.2 13.9 16.0 5.9 2.9 5.2 0.7 4.5 11.4 16.6 0.3 4.9 (7.0)

Jun-13 8.1 9.7 14.0 17.2 1.6 8.4 16.5 (0.4) 3.7 12.2 17.1 (1.2) 7.6 (0.5)

Jul-13 9.0 11.9 12.3 17.7 (7.4) 20.5 46.6 (4.8) 2.3 10.9 13.5 (0.5) 5.5 (2.4)

20.1 14.3 4.1 3.4 0.7 3.8 1.7 2.1 3.2 2.4 0.6 0.2 4.3 1.5

Exhibit 2: Uptick across broad components of inflation in July 2013

(%) 18.0 15.0 12.0 9.0 6.0 3.0 0.0 May-12 May-13 Mar-12 Mar-13 Oct-11 Aug-11 Aug-12 Oct-12 Apr-12 Feb-12 Feb-13 Apr-13 Jan-12 Jan-13 Jun-12 Jun-13 Jul-11 Jul-12 Sep-11 Dec-11 Sep-12 Nov-11 Nov-12 Dec-12 Jul-13 Primary Articles Fuel and Power Manufactured Products

Source: Office of Economic Adviser, Angel Research

Fuel and power weightage 14.9%

Inflation in fuel and power paced up on expected lines reflecting higher revision of petrol, diesel and ATF prices due to pass-through of higher crude prices. Inflation in fuel and power index came in double-digits at 11.31% as against a moderate 7.12% in the previous month and 8.39% in July 2013. The fuel index faces a double whammy of rising crude prices as well as INR depreciation on a yoy basis.

Manufactured products weightage 65.0%

The secular trend of deceleration in manufactured inflation since the past nine months has come to a halt with a slight uptick during the month. Manufactured articles reported an inflation of 2.81% in July 2013 as compared to 2.75% in June 2013 and 5.87% in the corresponding period of the previous year. Manufactured food inflation at 5.04% in fact decelerated to a 28-month low. But core (non-food, non-fuel) inflation which was trending lower since the past one year owing to soft
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WPI Inflation July 2013

commodity prices as compared to the previous year and sluggish demand conditions has risen to 2.3% from 2.1% during June 2013 and 5.7% in July 2012. Since pricing power in manufacturing continues to remain weak, we believe a large part of this rise can be attributed to the currency depreciation.

Exhibit 3: Deceleration in core inflation halts as it edges higher

(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Jun-11 Jun-12 Oct-11 Dec-11 Oct-12 Aug-11 Aug-12 Dec-12 Apr-11 Apr-12 Feb-12 Feb-13 Apr-13 Jun-13 2.3 5.8 WPI Inflation Core Inflation

Source: Office of Economic Adviser, Angel Research

Policy Outlook
Our view is that a good monsoon, decent rabi production, increase in sowing of kharif crop this year and moderate MSP hikes are likely to keep food inflation in check going ahead. However, owing to the sharp INR depreciation on a yoy basis, inflation in fuel and manufactured components is likely to have bottomed out. Having said that, we rule out any significant upside risks to headline inflation beyond 6.0% by end-March 2014, owing to sluggish growth and demand conditions. As far as the monetary policy stance is concerned notwithstanding the growthinflation dynamics, at present the external situation (ie. stability in the exchange rate, level of the current account deficit as well as its financing) continues to be the dominant consideration. The Reserve Bank of India has so far taken a number of strong liquidity tightening measures in order to contain volatility in the exchange rate without hinting at any change in policy rates possibly owing to growth considerations. But the overhang of global and domestic factors affecting the INR is likely to continue in the near term. In addition, we believe that the recent inflation readings suggesting pass through of INR depreciation into WPI inflation and still-elevated Consumer Price Index (CPI) inflation at 9.6% are likely to limit flexibility in the policy stance in the near-term. Hence, the calibrated withdrawal of the tightening measures could be challenging for now and we believe that these measures are likely to be in place for longer than anticipated earlier.

August 14, 2013

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WPI Inflation July 2013

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

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WPI Inflation July 2013

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