WPI Higher At 7.55% In August 2012

The Wholesale Price Index (WPI) for the month of August 2012 came in at 7.55 per cent as compared to 6.87 per cent in July 2012. The street has been expecting a reading of a tad higher than 7 per cent and this figure has come in higher than that. In the sub indexes of WPI, food inflation has been seen coming down from 10.06 per cent in July to 9.14 per cent in August. The areas that have seen a considerable gain are Non food articles and Fuel and Power group which were seen higher by 3.8 per cent and 3.1 per cent respectively.

The markets today were boosted because of positive moves on both fronts, domestic and international. The Fed yesterday launched QE3 through which it would buy Mortgage-Backed Securities (MBS) worth USD 40 billion per month. The Fed, in addition to the bond purchase also said it intended to keep the benchmark short-term interest rate at near-zero levels until mid-2015. This aggressive strategy was cheered in markets worldwide. Meanwhile on the domestic front, the government finally took steps to revive the economy by increasing diesel prices by Rs.5 per litre and restricted sales of subsidising LPG cylinders to six per consumer annually. This was invited by the Indian markets with a more than 2 per cent upward move.

Though the Consumer Price Index (CPI) for July 2012 came in lower at 9.86 per cent, it left little room for RBI to consider a rate cut. Government inaction had been since long adding pressure on the RBI to boost the economy amidst tackling high inflation. What added more pressure on the rate cut scenario, was the monsoon situation. Because of the delay creating a draught like situation in many parts of the country, the risk of inflation was significantly higher. This sentiment though curbed down with the deficiency being covered up in the later part of the season.

With the focus being growth, action has to be edged around a reduction in fiscal deficit and boosting growth to ensure we move higher from the low GDP levels. With the WPI data indicating higher inflation and action on the government front, it will leave the RBI with some space to breathe in. We believe the RBI will gauge levels and indicators based on the CPI data to be released in a few days and take into consideration government policy and its effects making the probability of a rate cut any time soon lesser. Moreover, the diesel price hike will add to 10-15 per cent upward pressure on inflation. But till the time there is movement towards boosting economic growth, RBI can test the effects and a rate cut can sit for a while.