WPI For March At 6.89 Per Cent: Is A Rate Cut Imminent?

The wholesale price index (WPI) for the month of March 2012 stood at 6.89 per cent as compared to 6.95 per cent for February 2012. When compared to the same month last year the WPI is seen to have decreased by 279 basis points. Further, the WPI for January 2012 was revised higher by 34 basis points to 6.89 per cent. 

Broadly, WPI inflation is divided into three parts viz. for primary articles (weightage of 20.12 per cent), fuel & power (weightage of 14.91 per cent) and manufactured products (weightage of 64.97 per cent).  On a MoM basis the primary article inflation increased by 334 basis points to 9.62 per cent while the other two major segments witnessed a declining trend. Fuel & power inflation decreased by 242 basis points to 10.41 per cent while the inflation of manufactured products decreased by 88 basis points to 4.87 per cent.

Food article inflation moved higher on the back of a rise in the prices of basic food articles like cereals, rice, pulses, vegetables, etc. The WPI for vegetables increased from 1.52 per cent in February 2012 to 30.57 per cent in March 2012. Further data revealed that the prices of milk and potatoes also went through an upward shift. The price of onions decreased substantially in comparison with the spike in prices last year.

The prices of petrol, diesel and liquefied petroleum gas remained at the same level as the government had postponed a price hike in the past on the back of major events like elections and the Union Budget. With the crude price hovering around USD 125 per barrel it is expected that the petrol price will be hiked approximately by Rs 3 in the near to medium term. This will again create inflationary pressures in the economy as any rise in petrol prices has a direct impact on overall financial status. This is mainly because the transportation cost increases, thus resulting in a rise of prices of most of the commodities.

The question that arises is whether inflation is under control and in a comfort zone? Will the RBI cut the much-awaited repo rate in its monetary policy which is scheduled to be announced tomorrow i.e. April 17, 2012?

In our opinion, the economy is still under the pressure of high inflation and high interest rate and will continue to be so in the near term. The RBI had stated that it would bring down inflation at 7 per cent for FY12. Provisional figures for March 2012 came in at 6.89 per cent which shows that inflation is in a comfort zone. But here one should note that most of the times the provisional figures are below the actual numbers as could be seen from the revised January 2012 data which increased by 34 basis points to 6.89 per cent.

Therefore the actual WPI number for March 2012 might be higher than 7 per cent (probably in the range of 7.10 to 7.40 per cent). Also, we feel that food article inflation is still on the higher side and affecting the common man. The major impact of this would be seen in the consumer price index (CPI) numbers for March 2012, which would be released on March 18. Further, the announcement of a hike in excise and service tax in the budget will add to the inflationary pressure as the companies will pass on this cost to the consumers.

The RBI in its mid-quarter monetary policy review of March had mentioned that the upside risk to inflation has increased from the recent surge in crude oil prices, fiscal slippages and rupee depreciation. We believe that, materially speaking, nothing has changed with regards to these parameters and hence the economy continues to face the same risks. Therefore, it would be advisable for the RBI governor to take a pause in rate hike in order to stabilize the economy.

According to a survey conducted by media houses, more than 80 per cent of the respondents expect a rate cut in tomorrow’s monetary meet. One has to watch out for the guidance and forecasts for various other key parameters like deposit growth, credit growth, inflation, money supply, GDP growth, etc for fiscal 2013. The impact of the same would also be seen on the markets. Nevertheless we will be updating our investors through the Mindshare column on our website.