Dec 2012 WPI Softens, Food Prices Drive CPI Up

Today (Jan 14, 2013), the government of India released the Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation numbers for the month of Dec 2012. The data was much-awaited because the inflation numbers would help decide the fate of the rate cut by the RBI in its next monetary meet scheduled on Jan 29, 2013. While the WPI has shown signs of softening, the CPI, which reflects the ground level inflation, moved higher, which spells trouble for consumers. Let’s take a look at what the numbers indicate, and whether the RBI can be expected to cut the key repo rate any time soon in light of these numbers.

The WPI figure for Dec 2012 came in at 7.18% against the street’s expectation of 7.3%, which was positive. Further, the inflation data for Oct 2012 has been revised downwards to 7.32% against earlier estimates of 7.45%. The WPI has been showing a declining trend over the past couple of quarters, and is also under the RBI’s projections of 7.5% for March 2013, hinting at the possibility of a rate cut.

Primary Articles inflation (which has a weight of 20.12% on the total index) increased to 10.61% from 9.42% in the month of Nov 2012. While Fuel and Power (14.91% of the index) and Manufactured Products (64.97% of the index) showed signs of moderation, and stood at 9.38% and 5.04% against 10.02% and 5.41% in the month of Nov 2012.

On the other hand, the CPI figure for the month came in at 10.56% as against 9.9% in Nov 2012. The provisional inflation numbers for the rural and urban areas for Dec 2012 stand at 10.74% and 10.42% as against 9.97% and 9.69% respectively for the previous month. The prices of vegetables, fruits and sugar have witnessed an upward trend in the last one year, increasing approximately by 25.71%, 10.39% and 13.55% respectively.

The prices of fruits and vegetables may cool off in the coming months due to a better kharif crop. However, some of these benefits may be offset by the recent all-India Railway fare hike (effective from Jan 21, 2013) as well as the government’s decision to increase the diesel and LPG prices.

Overall, we believe that even though the CPI data reflects the actual purchasing power of the consumer, the RBI focusses more on WPI. The central banker had earlier said that it would usher in policy easing in the March quarter of 2013. Needless to say though, the risk to inflation remains and the policy stance would remain sensitive to these risks. The Index of Industrial Production (IIP) figure for the month of Nov 2012 came in at negative 0.1%, increasing concerns over economic growth.

With the WPI and IIP showing signs of moderation, we opine that the RBI should go ahead and slash the repo rate by 25 basis points in its forthcoming meeting. Of course, with all the factors in play, the panning out of the inflation scenario ahead also needs to be looked at. Hence, at this point of time, we believe that a 25 basis point repo rate cut would be an ideal decision by the apex body as it would be stance supporting a balanced growth and inflationary dynamic.