Markets Cheer As WPI Eases
DSIJ Intelligence / 14 Jun 2013
With the WPI and CPI indicating decent moderation in the inflation scenario, the depreciating rupee and the widening CAD is likely to complicate matters for the RBI in terms of interest rates
Inflation, measured by the wholesale price index (WPI), stood at 4.7% for the month of May 2013 (over May, 2012) against 4.89% for the month of April 2013 and thus considerably lower than the 7.55% for May 2012. This is the fourth consecutive month when the inflation has moved southward and is recorded at the lowest in the last 3 years. It has come below market expectations, which was in the range of 4.8% to 5.2%.
A drop in the manufactured product inflation having total weightage of 64.97% has aided this fall. The manufactured product inflation has increased by just 3.11% for the month of May 2013. Basic Metals Alloys & Metal Product, which forms the part of manufactured product and has a total weightage of 16.5% in the manufactured products, saw inflation at -1.5%. Another notable fall was seen in Iron & Semis, which fell by 7.29%.
The primary article (weightage of 20.12%) recorded inflation of 6.65% for the month. Although this is lower than the month of May 12 (10.31%), it is still higher than that of April 2013.
Inflation for FUEL & POWER (weightage of 14.91%) dropped, both on MoM and yearly basis and was recorded at 7.32%. The fall was primarily aided by the dip in petrol prices by 4.43% on a yearly basis.
Earlier this week, the figure for consumer price index (CPI), another way of calculating inflation, came in at 9.31%, marking a third straight month of decline.
These numbers would have made the RBI decision on cutting key policy easy in normal circumstances but the sharp depreciation in rupee has changed the scenario. The fall in the external value of rupee coupled with the ever-widening current account deficit (CAD) will definitely make it difficult for the RBI governor to take a call regarding the interest rates in its next meeting (June 17).
However, we are of the opinion that the RBI should go ahead and cut interest rates as growth has to be the priority after the GDP growth has slipped to a decade’s low. Moreover, this fall in the rupee is already arrested and may be a temporary phenomenon.
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