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WPI Inflation Update


Trends in Inflation for the month of December 2012 
Primary articles inflation paced higher to double digits (10.6% yoy) during the month as compared to 9.4% yoy in the previous month and 3.6% yoy in the corresponding period of the previous year. Amongst this category, inflation in food articles edged upwards to 11.2% yoy as compared to 8.5% yoy in November 2012 and 0.8% yoy in December 2011. Inflation in food grains continued to remain high at 18.7% yoy vis-à-vis 16.5% oy in the previous month and inflation in fruits and vegetables reported a 13.2% yoy rise as compared to a 3.1% in the previous month on a lower base particularly for vegetables. Inflation in vegetable soared to a five-month high of 23.3% yoy but on a mom basis, it declined by 6.2% mom. Inflation in protein-rich items such as milk and eggs, meat and fish reported a growth of 5.8% yoy and 10.2% yoy respectively.   Non-food articles’ inflation witnessed a 13.2% yoy increase as compared to 14.0% yoy increase in the previous month while inflation in Minerals eased to 3.7% yoy as compared to 7.6% yoy in November 2012.  

Fuel and power – weightage 14.9% 
Fuel and power inflation decelerated for the third straight month to 9.4% yoy from 10.0% yoy in the previous month and 15.0% in December 2012. This can be attributed to deceleration in mineral oil inflation (7.6% yoy from 8.5% yoy in the previous month) owing to the index for naphtha, furnace oil and ATF fuel.

Manufactured products – weightage 65.0% 
Despite elevated inflation in manufactured food products (9.0% yoy as against  10.0% yoy in the previous month), inflation in the overall Manufactured products category cooled to 5.0% yoy owing to declining commodity prices.  Core inflation, the non-food manufacturing component of inflation, alleviated to more than a two-year low level. During December 2012, core inflation slipped for the fourth consecutive month to 4.2% yoy from 4.5% yoy in the previous month and 8.0% yoy in December 2011.

Policy Outlook  
We believe that the recent data points including decline in industrial production, moderation in headline inflation print for the third straight month, and easing of the core component within the Reserve Bank of India (RBI)’s comfort zone, make for adequate grounds for monetary policy easing by the RBI. In its third quarter monetary policy review on January 29, 2013, we expect the RBI to reduce the repo rate by 25bp.  At the same time, the present moderation in inflation is unlikely to continue goin ahead post the fiscal year end. We believe that upside bias to inflation is likely from factors such as the recent hike in railway passenger fares and implementation of the much-discussed hike in diesel prices since it would release suppressed inflation in the economy and fuel inflationary pressures in the short-term, although beneficial for the medium-term outlook. We believe that managing inflationary pressures remains one of the key priorities of the RBI. Therefore, unless the fiscal deficit is brought to manageable levels and the emanating inflationary pressures contained, it is unlikely to get elbow room for adopting an aggressive easing policy. For CY2013, we expect the RBI to ease policy rates by about 75bp-100bp.    

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