February 2013 WPI Comes In At 6.84%

The much awaited Wholesale Price Index (WPI) inflation for the month of February 2013 came in at 6.84%, which was higher than the street’s expectations of around 6.5%. The numbers were delayed for an hour creating volatility in the index. However, the markets moved higher as it still expects the RBI to slash the rates on Tuesday (March 19, 2013) in its monetary policy meet.

WPI for the month of January 2013 had come in at 6.62% and hence the number for February is higher by 22 basis points. Well, this is majorly on account of higher fuel inflation (after the government deregulated diesel and LPG cylinder) which grew by 341 basis points to 10.47% on a month on month basis. The LPG prices were higher by 21.93% (absolute basis), petrol prices were up by 2.48% and diesel prices were up by 4.17% on a MoM basis. Also, one should note that the numbers for the month of December 2012 have been revised upwards by 13 basis points to 7.31%. Looking at the WPI numbers, it remains to be seen if a rate cut is likely next week.

Well we believe that the answer is yes. The RBI would go ahead and slash the repo rate at least by 25 basis points to 7.5% on Tuesday (March 19). This is because the fuel inflation was expected to come in higher.

One must also look at it from the other way. The government reduced its overall subsidy burden which is nothing but trimming its expenses helping the twin deficit to be in control. The Governor also had emphasised on both the current account and fiscal deficit front and its urgent need of hour to bring it down. The FM, in the budget, has shown a sense of confidence in achieving a lower deficit target which was well accepted by the markets.

The other categories, like Primary Articles and Manufactured Products came in lower. And therefore, despite a rise in the WPI numbers for February, we do expect a rate cut. The core inflation for the month of February 2013 stood at 3.8% which is lower than 4.1% for January 2013 raising more hopes for a cut in the monetary meet.

Further, the question is that are we also looking at Cash Reserve Ratio (CRR) cut. Most of the market participants are of the view that there is a liquidity crunch in the system as the fiscal year is ending. Adding to the same, there is an advance tax payment which is due tomorrow, thus withdrawing more cash from the system. Hence, there could be a possibility that the apex body may slash CRR by 25 basis points in its meet.

Overall, we believe that a 25 basis points cut in the repo rate is factored in the market. However, one should note that the Governor has the habit of surprising the street and hence one might also see a status quo or a 50 basis points repo rate cut. Considering the current economic scenario, with the December 2012 quarter GDP at 4.5%, the probability of the latter option could not be ruled out either. Nevertheless, we would be updating our readers on the same.