WPI For May 2012 Rolls In At 7.55%

DSIJ Intelligence / 14 Jun 2012

The much-awaited Wholesale Price Index (WPI) for the month of May 2012 came in at 7.55 per cent, higher by 32 basis points on a month-on-month basis. In this scenario it would be very challenging for the RBI to choose between growth and inflation.
The much-awaited Wholesale Price Index (WPI) for the month of May 2012 came in at 7.55 per cent, higher by 32 basis points on a month-on-month basis. This was above the street expectation of around 7.4 per cent. One should note that the WPI for the same month last year (May 2011) stood at 9.56 per cent. Further, the major shock was from the WPI data for the month of March 2012, which was revised upwards by 80 basis points to 7.69 per cent.
 
As soon as the data for the WPI was released by the economic adviser at noon today, the market turned its direction southwards, closing the day lower by more than 1 per cent. Interest rate-sensitive sectors like Bankex and Realty closed the day down by almost 3 per cent. This was on the back of hopes that the RBI may maintain its status quo, thereby affecting the growth of the economy.

Broadly, WPI inflation is divided into three parts i.e. 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). The primary article inflation index rose marginally by 0.1 per cent on a month-on-month basis. The index is further divided into the food article group which declined by 0.1 per cent and the non-food article group which grew by 1.7 per cent. Further, the hike in petrol prices by about Rs 5.50 (Rs 7.50 less Rs 2.00 roll-backed) led the fuel & power index to inch higher by 1 per cent on a MoM basis. On the index the petrol prices increased by 3 per cent, bitumen by 2 per cent and lubricants by 1 per cent. Lastly, the heavyweight of the WPI i.e. the index of manufactured products grew by 0.5 per cent on a MoM basis.  

Now all eyes are on the RBI’s monetary meet scheduled for Monday, June 18, 2012. One should note that the RBI had earlier hinted at the stickiness of inflation and that is what has actually transpired. The revision of the WPI for the month of March 2012 by 80 basis points to 7.69 per cent goes well above the RBI’s comfort level of 7 per cent for FY12. Further, we believe that the WPI for April which stood at 7.23 per cent would also be revised by 30 to 50 basis points on the higher side. Further the following table gives us the trend of the WPI Inflation over the past eight months : 

In this scenario it would be very challenging for the RBI to choose between growth and inflation.  One should further note that a 25 basis points’ cut in the repo rate and CRR each is already factored into the market. We believe that the RBI should maintain a status quo in its meet and if that happens one may see the broader markets moving southwards by about 2 to 3 per cent. Investors are advised to adopt a ‘wait and watch’ strategy as on Monday the market will take cues from the RBI meet and also from the CPI data for the month of May 2012 which is expected to be released on the same day.

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