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WPI Inflation January 2012-Monthly Inflation Update-15 Feb 2012

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					                                                                                                               Institutional Equities

                                                WPI Inflation – January
                                                                                                                            15 February 2012



                           Inflation slips to two-year low of 6.6% YoY                                                               Apurwa Shiva
                           Wholesale Price Index (WPI) inflation eased YoY to a two-year low of 6.6% in                              apurwa.shiva@nirmalbang.com
                           January 2012 from 7.5% in December 2011 because of moderation in the prices of                            +91-22-3926 8211
Monthly Inflation Update




                           food items and manufactured products. Food inflation contracted YoY to -0.5%
                           compared to 0.7% in December 2011, but rose MoM to 0.3% from -3.1% as the
                           positive harvest season effect waned. Inflation in manufactured products eased to
                           6.5% in January 2012 from 7.4% in the previous month due to a slight fall in the
                           prices of textiles and other manufactured products following moderation in global
                           commodity prices (except crude oil). Meanwhile, November 2011 WPI inflation
                           figure was revised upwards by 35bps to 9.46% YoY from 9.11%, indicating upward
                           demand-side pressure.
                           Food inflation witnessed a significant fall since November 2011 because of a steep
                           decline in the prices of vegetables and moderation in cereal prices due to increased
                           supply, while the prices of milk and other protein items were firm. The economic turmoil in
                           most developed nations weakened global demand which led to a decline in commodity
                           prices. Moderation in global commodity prices and a marginal appreciation in the rupee
                           (as compared to December 2011) benefited India’s manufacturing segment by way of
                           lower import costs. However, even though the prices of most commodities moderated,
                           soaring prices of crude oil kept inflation in fuel and power and related petroleum products
                           at a high level. On account of the consistent rise in crude oil prices, upward revision in
                           petrol prices and deregulation of diesel prices is likely in the near future. YoY moderation
                           in inflation has strengthened hopes of a cut in interest rates by the Reserve Bank of India
                           at its next monetary policy review scheduled on 15 March 2012. However, we expect the
                           central bank to ensure sustainable moderation in core inflation, which is still firm. Food
                           inflation may again start its northward journey after the harvest season.
                           Food inflation up sequentially: Within primary articles, food inflation contracted to
                           -0.5% YoY from 0.7% in December 2011 due to higher base of the previous year.
                           However the segment exhibited contraction on YoY basis, but the food article index rose
                           0.3% in January 2012 compared to -3.1% in the previous month as the positive effect of
                           the harvest season waned. Inflation in milk and protein items soared to 12.2% and 18.6%
                           in January 2012 as compared to 11.0% and 11.9%, respectively, in the previous month.
                           Inflation in non-food articles moderated to 0.6% YoY from 1.5% in November 2011, but
                           the non-food article index grew 2.4% in January 2012 from 1.3% in December 2011 due
                           to a rise in the prices of oil seeds. Overall primary article inflation stood at 2.3% YoY in
                           January 2012 as compared to 3.1% in December 2011.
                           Exhibit 1: YoY growth in WPI and its prime constituents
                                                                  Primary article
                                                    Primary      Food        Non-food              Fuel &      Manufactured
                           (%)
                                        WPI          article    article          article           power          products
                           Weight       100.0           20.1       14.3              4.3             14.9               64.9
                           Jan-11         9.5           18.4       16.7             26.6             11.4                5.3
                           Dec-11         7.5            3.1         0.7             1.5             14.9                7.4
                           Jan-12         6.6            2.3       (0.5)             0.6             14.2                6.5
                           Source: Office of economic advisor




                                                                   Please refer to the disclaimer towards the end of the document.
                                                                                                           Institutional Equities
    Exhibit 2: YoY growth in WPI and its prime constituents
                    (%)
                    18
                    16
                    14
                    12
                    10
                     8
                     6
                     4
                     2
                     0

                                        Feb-2011




                                                                                                                                 Oct-2011
                                                              Apr-2011

                                                                          May-2011




                                                                                                Jul-2011
                            Jan-2011




                                                                                     Jun-2011




                                                                                                                                            Nov-2011

                                                                                                                                                       Dec-2011

                                                                                                                                                                  Jan-2012
                                                                                                           Aug-2011

                                                                                                                      Sep-2011
                                                   Mar-2011
                    (2)


                                       Food articles                     Fuel & power                      Manufactured products                              WPI
    Source: Office of the economic advisor

    Exhibit 2 shows YoY inflation in food articles at -0.5% in January 2012, while inflation in fuel and
    manufactured goods witnessed a slight moderation from the previous month.
    Fuel and power inflation
    Inflation in fuel and power moderated by 70bps to 14.2% in January 2012 from 14.9% in the previous month
    due to YoY fall in the prices of mineral oil, while inflation in coal stood at 13.3% compared to 13.2% for the
    same period. The consistent rise in inflation in this segment was primarily on account of rising prices of coal,
    aviation fuel, furnace oil and naphtha. Except for coal, the prices of rest of the items are market-determined.
    Manufacturing segment inflation
    Inflation in the manufacturing segment eased to 6.5% in January 2012 from 7.4% in the previous month,
    mainly due to moderation in the prices of manufactured food products, textiles, and basic metals. Within the
    manufacturing segment, inflation in chemicals moderated to 9.1% in January 2012 from 9.8% in the previous
    month, primarily due to a marginal fall in inflation in fertilisers to 15.8% from 16.2% in December 2011.
    Inflation in basic metals eased to 12.0% in January 2012 from 13.0% in the previous month following
    moderation in global commodity prices. Inflation in plant and machinery and transport services stood at 2.6%
    and 3.1% in January 2012 compared to 2.8% and 4.5%, respectively, in the previous month.
    Exhibit 3: YoY growth in main manufactured product segments and WPI
                           (%)
                          20

                          15

                          10

                            5

                            0
                                        Jul-10




                                        Jul-11
                                       Jun-10

                                       Aug-10
                                       Sep-10

                                       Nov-10
                                       Dec-10
                                       Jan-11




                                       Jun-11

                                       Aug-11
                                       Sep-11

                                       Nov-11
                                       Dec-11
                                       Jan-12
                                       Apr-10




                                       Oct-10




                                       Apr-11




                                       Oct-11
                                       Feb-10
                                       Mar-10




                                       Feb-11
                                       Mar-11
                                       May-10




                                       May-11




                           (5)
                                        Manufactured food                            Textiles                                    Chemicals
                                        Basic metals, alloys                         Machinery & machine tools                   WPI

    Source: Office of the economic advisor

    Exhibit 3 shows YoY inflation in textiles and manufactured foods moderated, but inflation in chemicals and
    basic metals still hovered above 9%.




2                                                                                                                                                                        WPI Inflation
                                                                                                             Institutional Equities
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