April WPI was up 8.66%
— Headline inflation rose 8.66%YoY in April, marginally higher than our and consensus estimates of 8.5%. The rise in primary articles (+12%YoY) and the fuel index (+13.3%) was in line with weekly readings. Headline manufactured products (+6.2%) remained firm, although the closely-watched 'manufactured non-food products' index posted a moderation to 6.3% from 7.3% last month. This was due to higher manufactured food products (+5.7% from 2.4% last month- see page 2).
Looking ahead, we maintain our view that prices will remain elevated due to: (1) imminent hikes to domestic fuel prices, (2) significant upward revisions to past data. (3) and monsoons are a key factor to watch from the perspective of primary article prices.
Past Readings see Significant Revisions — A key concern is the continued upward revision in previous readings, with Feb inflation being revised to 9.5% from 8.3% earlier. Moreover, the Ministry has issued a statement highlighting a 'program error' in the series, by which 'Metal Products' were not included in the Basic Metals and Alloys sub-component of Manufactured Products. With the inclusion of this item, there have been marginal revisions to historical data. As a result, the March WPI print has also been revised to 9.04% from 8.98% earlier.
Fuel Price Hikes: Possible Implications — The govt's Rs5/ltr petrol price hike, implemented over the weekend, should result in an ~8bps direct impact on WPI. Petrol prices do not require ministerial approval to be changed as they were deregulated last year (companies had agreed to defer price hikes until after state elections). Thus, the item key to watch for would be prices of diesel and LPG which were to be raised during the 11 May EGOM meeting, but were deferred to this week. We expect a 10% hike, which would result in a direct impact on inflation of 56bps.
Outlook: Prices Likely to Remain Elevated — Inflation is expected to average 8% in FY12, with the 12 Mar reading likely to come in at 7.5% v/s RBI's target of 6%. With the RBI stating that 'bringing inflation down, even at the cost of some growth in the short-run, should take precedence'; we expect a further 75bps of tightening, taking policy rates to 8% by end 2011. However, WPI remaining firm despite ~400bps of tightening does raise issues on the impact of commodity prices and structural factors on headline WPI.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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