June 2013 Inflation Below Expectations

After the dismal IIP data for May 2013, the wholesale inflation data for June 2013 is out. The June inflation has come in at 4.86% against 4.70% in May 2013 and 7.58% in April 2012. This is well below the expectations of a 5% rise in the June 2013 inflation. The numbers are encouraging enough for the RBI to cut rates. Earlier on Friday (July 12) last week, the CPI inflation indicated that the consumer level inflation has increased by 9.87% in June 2013 against 9.31% in May 2013.

During the month, the primary articles inflation rose by more than 8% as against 6.65% in May 2013. Food articles inflation also rose from the May 2013 levels but it has mainly remained below 10%, in line with the last four months’ trend.

Fuel and power led inflation grew by 7.32% in May 2013 while in June 2013 it grew by 7.12%, showing a further softening of prices. Amongst this, the prices of diesel have shown a rise due to the deregulation of diesel prices by the government. During this month, diesel led inflation has increased by nearly 23%. The manufactured products inflation has also shown some softening. In May 2013, manufactured products inflation was at 3.11%, while that in June 2013 has managed to grow only by 2.75%.

A few products such as Non-Metallic Mineral Products, LNG, Rubber, Leather & Plastic Products, Fibres, Egg, Meat, Fish, Onions and other vegetables have shown a rise in the prices.

These inflation numbers have been cheered by the markets as the below expectation numbers have heightened the expectations of a repo rate cut in the forthcoming RBI meet due by the end of July. It should be noted that the May 2013 inflation numbers have been revised downwards meaning that inflation has slowed down more than expected in May 2013.

On the other hand, it would be interesting to watch the numbers for July considering the fall in the rupee and the recent petrol price hike. Currency depreciation is not yet factored in the WPI numbers and hence it would be wrong to say that inflation is stabilising at the current levels. We thus don’t expect the RBI to cut rates. There is a slight possibility of a CRR cut as liquidity is the main concern in the markets with the news of the QE tapering by the US.