WPI Below 6% For The First Time Since Nov 2009

After the retail level inflation (CPI) eased in March 2013, the expectations were high that the wholesale inflation (WPI) would also show some decline. Well, the WPI has come in at 5.96% against 6.84% in February 2013, giving a major comfort to the markets. This is for the first time after November 2009 that inflation has fallen below 6%. The Indian equity markets have moved 1% higher as a result of the drop in WPI, and are anticipating another rate cut. The yield of the 10 year government bonds fell by 0.33% to 7.85% indicating a rate cut.

The expectations of WPI were between 6.4%-6.5%, and hence the WPI at 5.96% has surprised many. The Ministry of Commerce has revised the January 2013 WPI number to 7.31% against the provisional figure for that month at 6.62%.

The drop in the WPI is higher than what was expected by experts and economists. The drop is largely attributed to the easing in food inflation by 8.73% from 11.38% a month earlier. This might give some comfort to the government as well as the RBI which have been saying that consistently higher food inflation is detrimental to the economy as well as the common man.

The press release for the March 2013 WPI indicates that the primary articles inflation has come down to 7.6% from 9.70% in February 2013. Fuel and Power inflation is at 10.18% against 10.47% a month ago. Though petrol and gas prices have eased, diesel prices have moved up which is a result of decontrol of diesel prices. Manufactured products inflation is at 4.07% which is also comforting as the reading has fallen frrom 4.51% reported in February 2013.

Besides diesel, edible oil, paper, fibers, chemicals, metal products and textiles have shown a rise in the inflation levels but that is not so much a reason for worrying as the overall inflation has moderated.

Last week, in a separate data, CPI for March 2013 was reported to have eased to 10.39% from 10.91% in February 2013. There too, the food inflation moderated to 12.42% from 13.73% on a MoM basis. The CPI numbers also indicated that the retail inflation has eased in both rural and urban markets.

At 5.96%, the WPI is a good figure and is also in the comfort zone of RBI which in the last meet had said that there is less room for rate cuts ahead in the year. The apex bank may now need to revisit the statement as the inflation number is in its comfort zone. The next RBI meet on monetary policy is scheduled for May 3, 2013. The comments of the RBI's chairman will also keenly tracked by the markets.

The high probability of the rate cut is also due to the fall in the gold and crude oil prices which will improve the current account deficit (CAD) of the country. A flat growth in the industrial production is also another reason that the RBI may cut rates.

Overall, the WPI figure at 5.96% is much better than expected, likely to garner some rate cuts from the RBI this year.