WPI For The Month Of April 2012 At 7.23 Per Cent

The wholesale price index (WPI) for the month of April 2012 came in at 7.23 per cent from 6.89 per cent for the month of March 2012. It was surprising to see the WPI numbers being higher by 34 basis points as the streets expected a moderation in the WPI and the expectation had hovered at around 6.7 per cent. As soon as the data was released the market gave up all the morning gains, and traded lower by almost 0.50 per cent, helping the Nifty to breach the psychological 4,900 mark. One of the reasons behind the rise in inflation could be the impact of the hike in excise duty and service tax by 200 basis points in the budget announcement.

Further, the WPI for the month of February 2012, was revised from 6.95 to 7.36 per cent which further hints that inflation for the month of March 2012 will be further revised 25 to 40 basis points higher (from 6.89 of the initial estimate) and will breach the RBI’s comfort zone of 7 per cent for March 2012.

On a month-to-month basis the fuel Inflation increased by 62 basis points to 11.03 per cent while food inflation increased by 55 basis points to 10.94 per cent. One should, however, note that the crude prices have come down from the level of USD 125 per barrel to USD 111 per barrel but this is still above the comfort zone. Further, a fuel price hike may be on the radar and this may push the inflation index higher.

According to media reports, the Commission for Agriculture Costs and Prices (CACP) has recommended an increase of approximately 15 to 40 per cent in the minimum support price (MSP) for various crops for FY13. One should note that this hike may increase the food prices, thus impacting the common man.

The consumer price index (CPI) numbers should be considered more reliable as they reflect ground level prices that affect the common man’s budget. The CPI data for the month of April 2012 is going to be announced later this week i.e. on May 18, 2012. To reiterate, the CPI for the month of March 2012 came in at 9.47 and we now expect this to be around double digits for the month of April 2012.

We had clearly maintained a high inflation and high interest rate environment at least in the near to medium term. Last week, with the dismal IIP numbers, there was the expectation that the RBI would further cut the rates to fuel growth. But with inflation coming in at higher levels, the RBI will probably not go in that direction. In our earlier article we had stated that we hope that things work as per the RBI guidance i.e. inflation shows moderation going ahead and the rate cut (50 basis points on April 17, 2012) will fuel growth.

However the inflationary pressure continues, and so what will be the RBI next step? All one has to do now is to just wait and watch for the CPI data which is to be released on May 18 and the outcome of the RBI monetary meet, both of which could provide further direction for the markets.