February WPI Inflation At 6.95 Per Cent

As per data released by the Govt. of India, wholesale price index (WPI) inflation for month of February rose to 6.95 per cent as against 6.55 per cent in the previous month. The February WPI data is slightly higher than the Reuters Poll of 6.8 per cent. The reason for this rise in inflation for month of Feb can be attributed to the sudden spike seen in primary articles inflation which stood at 6.28 per cent as compared to 2.25 per cent in the previous month.

The sudden spurt in primary articles inflation has been majorly led by a 555 bps jump in food articles inflation which came in at 6.07 per cent for Feb as compared to -0.52 per cent in Jan 2012. Prices of Eggs, Meat and Fish rose yet again for another month.  

However, the rate of rise was halted to some extent by the month on month fall seen in fuel prices inflation, which came in at 12.83 per cent after hovering between the 14-15 per cent marks over the past couple of months. However, owing to the rising subsidy burden on the govt. and the enormous losses posted by the domestic oil retailers on sale of subsidized fuel, we don’t expect any further ease in fuel inflation as a fresh round of fuel prices hikes seem just round the corner. A hike in retail fuel prices would end up spiking inflation further upwards.

The month of Feb also saw some moderation in manufacturing items which came in at 5.75 per cent as against 6.49 per cent last month. However, this may also not bring about much cheer as any rise in fuel costs may compel manufacturers to pass it on and this will indirectly led to a rise in headline inflation too.

The only positive to take away from the latest set of WPI inflation figures is that it stands significantly below the 9.54 per cent we had seen in corresponding month of the previous year. Also on a cumulative basis inflation stands at 5.95 per cent as against 8.66 per cent last year.

However, after it showed some significant signs of cooling of in the past 3-4 months, inflation in terms of WPI has bounced back up and continues to hover near the RBI’s comfort zone of 7 per cent which is an alarming signal. Also the latest inflation as per CPI data suggests that in month of Jan rate of price change stood at 7.65 per cent.

In conclusion, looking at the current rise in inflation data and keeping in mind RBI’s key objective to control inflation at cost of growth, we feel that RBI might not cut back key policy rates in its coming monetary policy review which is expected to be released tomorrow at noon. Also it recently cut CRR’s in a move to infuse liquidity into the system which certifies our conviction that the next reversal in interest rates would be sometime in FY13.