[T.S.R:17497] India Inflation: Into A New Uncontrollable Orbit

After a softening in Apr '11, headline inflation rose to above 9% in May '11, fueled by a steep and broad-based rise in manufactured product prices. We expect inflation to remain high in 1HFY12, before softening in 2HFY12. The RBI is likely to raise the repo rate by 25bps on 16 Jun '11.

n       Inflation inches up. India's annual inflation (based on the wholesale price index) increased to 9.1% in May '11 (our estimate: 9.1%; consensus: 8.7%), from 8.7% in Apr '11. Mar '11 WPI inflation was revised to 9.7% from 9% earlier.

n       Broad-based price rise. While price indices for primary articles and fuel increased 0.3% (m-o-m) each in May '11, that for manufactured products continued to witness a sharp upward trend (1%).

n       Manufactured products witnessing sharp rise in prices. All the 12 sub-categories of manufactured products saw a rise in their respective indices in May '11. Moreover, indices for textiles (2.5%), transport, equipment and parts (1.8%), and wood & wood products (1.7%) witnessed sharp m-o-m rise in prices in May '11.

n       Core inflation rising again. Non-food manufactured products inflation - an indicator of demand-side and generalized pressures on inflation - rose to 7.3% in May '11, up from 6.3% in Apr '11. Also, food inflation - both primary and manufactured - rose to 8% in May '11 from 7.6% in Apr '11.

n       Inflation assessment and outlook. Despite a modest price rise in primary articles and fuel category, prices of manufactured products have risen sharply since Jan '11, pushing inflation up. Moreover, if the government decides on a diesel price hike, it would have a significant impact on inflation. Thus, there is no major trigger to lower inflation in 1HFY12. In 2HFY12, however, we expect inflation to drop to the 6-8% range. Possible key triggers are: (a) good kharif (summer) crop that would hit the market in Oct '11 (b) softening of global commodity prices, a trend that is already visible, and (c) lagging impact of aggressive monetary tightening measures taken by the RBI since Feb '10.

n       Policy outlook. Despite recent weak growth data points (IIP, GDP), in view of sustained high inflation the RBI is unlikely to relent on its monetary tightening measures. We expect the RBI to raise the repo rate by 25bps on 16 Jun '11 and once more by the same amount in Jul '11.
 

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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