You are on page 1of 4

[Type text]

MSFL Research
August Inflation, Stubborn and Sticky
The headline Wholesale price Index (WPI) rate for August, 2011 came in at 9.78% as against the consensus estimates of 9.7% and higher than 9.22% recorded in the previous month. Build up inflation (YTD) in the FY12 so far was 3.61% compared to a build-up of 3.52% in the corresponding period of the previous year. As regards to breakdown of WPI items, all 3 sections of WPI have seen uptick during the month to the extent of 0.5% to 0.90%, though what leads the headline is the core Inflation (sticky by nature). The Nonfood manufacturing Inflation, RBIs proxy for core inflation index, was up 0.40% m-o-m (Vs 0.18% in Jul11), y-o-y it grew at 7.76%, a bit higher than Julys 7.53%. Core Inflation for Aug10 stood at 5.2%. Such sequentially increasing core inflation suggests pass-through of rising commodity costs and hence sustained pricing power. Though the inflation is a cost-push kind, and hence a minimal impact of the monetary tightening. In midst of global uncertainties, RBIs decision would possibly consider the present global uncertainties. Having said that, the domestic inflation-demand scenario clearly needs action --which if coming from the monetary side is likely in the way of a 25bps hike, with guidance being crucial for the future trend of interest rate cycle. Exhibit 1: Inflation Snapshot Particulars All Commodities Primary Articles Fuel, Power, Light & Lubricants Manufactured Products Wgt(%) 11-Aug 100 20.1 14.9 65 9.78% 11-Jul 10-Aug 9.22% 8.87% Exhibit 2: Core Inflation Trend (RBI watch)
Core Inflation 9% 7% 5% 3% 1% 3mma Core Inflation

12.58% 11.30% 15.96% 12.84% 12.04% 12.55% 7.79% 7.49% 5.16%

-2%

Aug-08

Aug-09

Aug-10

Nov-09

May-09

May-10

Nov-10

Nov-08

Source: Office of Economic Advisor, MSFL Research

Primary articles rise sharply The primary articles index rose by 0.86% m-o-m in August 2011 Vs 3mma of 0.2%. Sharp rise in primary articles was attributable to high inflation in Non food inflation, which has seen a jump of 3% on monthly basis. Amongst non food index rise was a homogenous one, significant being seen in flowers (12%), gaur seed (11%), coir fibre, raw cotton and safflower (7% each). However, the prices of raw rubber (4%) declined. Minerals index has declined by 0.4% on m-o-m basis as against average increase of 0.46% in past 3 months. Rise in food articles was mainly attributable to rise in prices of fish-inland (15%), ragi (8%), gram (6%).However, the prices of fishmarine (5%), urad (4%), arhar (3%) declined. However, the concerns on food Inflation still persists majorly because of a generalized increase in the MSP announced for the upcoming Kharif crop, major reason being- a sharp increase in labor wages (hence a double whammyhigh prices going forward + an increased demand). Fuel index rises nd Fuel index has seen uptick of 0.9% on m-o-m basis (as said earlier this shows the 2 round effect of the rise in administered fuel done in June) mainly due to higher prices of furnace oil (6%), naphtha (4%), light diesel oil (3%). Due to higher prices of crude in international markets and declining rupee further adding pressure to OMC margins, we probably expect another hike ministerial th group scheduled to meet on 15 Sep, to review under-recoveries of OMCs. Manufactured goods: Raising concerns Manufacturing index again has seen uptick of 0.44% on m-o-m basis however on y-o-y basis it stands at 7.8% which is nowhere near RBI comfort zone. The main reason for high manufactured inflation is largely due to rise in prices of Basic metals and alloy section which have increased sharply by 1.59% on monthly basis. Prices of the basic metals increased due to higher prices of gold & gold ornaments (14%), steel (12%), copper wire (all types) (10%). Beverages and tobacco increased due to higher prices of chewing tobacco (scented or not) (14%) and cigarette (2%). The manufacturing inflation has been in the uptrend since Dec10 owing to the generalization of a sustained >20% food Inflation and high global commodity prices.

Institutional Business Group, MSFL @p-sec, 306, Gresham Assurance House, 132, Mint Road, Fort, Mumbai 400 001 India Tel + 91 22 22690474 / 75 www.marwadionline.com

May-11

Aug-11

Feb-09

Feb-10

Feb-11

MSFL Research
Outlook Head Line inflation is expected to slowdown by end of CY11, as the transmission plays out fully, and a high base effect comes in. In th regards to the what steps would RBI take in the credit policy meet on 16 Sep. Couple of factors in this context RBI has been mantaining its firm anti-inflationary stance, to get the headline to its comfort zone of 4% (too far perhaps). Moreover, a slowdown in all the verticals of output (credit growth, production) has been factored in by the RBI in its policy review. And these numbers show the same: a fall in growth, though in lines, which is a part of demand adjustment process. The IIP numbers if watched closely imply a continuous but moderate slowdown rather than a sharp fall --CG for YTD-FY12 (average being a better indicator for CG) grew at 7.6%, the core IIP grew at 6.7% Inflation Expectations though have declined but growth still remains, lead being taken by the sticky core inflation. It grew 0.4% m-o-m, clearly signaling that the pricing power remains owing to demand. Added to the stickiness are: 1)the upcoming festive season, which brings the fear of sequential spike in the core index as seen historically 2) MSP of the kharif crop for FY12 have been increased in the range of 8% to 18%. Resulting in a 12% increase in the floor prices for the upcoming crop, putting a further upward pressure on the food Inflation even if the harvest is expected to be good 3) Probably we are already into a wage-price spiral evident from corporate wage bill rise ( has been accelerating since Q3FY11), unskilled labor wage hike done in the kharif season & the increasing input cost of the PMI-service data. Taking example from the other emerging economies: Korea, Indonesia, Malasia left the rates unchanged due to considerable signs of declining inflation (for India expected by Dec11). Hence only China remains a comparable with an increasing inflation. China in midst of uncertain global uncertainties left the rates unchanged, but increased the reserve requirement. Though the inflation is a cost-push kind, and hence a minimal impact of the monetary tightening. In midst of global uncertainties, RBIs decision would possibly consider the present global uncertainties. Having said that, the domestic inflation-demand scenario clearly needs action --which if coming monetary side is is likely in the way of a 25bps hike, with guidance being crucial for the future trend of interest rate cycle.. Exhibit 2: Trend in WPI Growth (% chg y-o-y)
12% 10% 8% 6% 4% 2% 0% WPI
25% 20% 15% 10% 5% 0%

Exhibit 3: Trend in WPI Components (% chg y-o-y)


Primary Articles Fuel, Power & Light Manufactured Goods

Aug-08

Aug-09

Aug-10

-5%

Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11

-2%

-10% -15%

Exhibit 4: Trend in Primary Articles (% chg y-o-y)


Primary Articles 35% 30% 25% 20% 15% 10% 5% 0% Food Articles Non-food Articles

Exhibit 5: Trend in Manufactured goods (% chg y-o-y)


Manufactured Goods 25% 20% 15% 10% 5% 0% Food Products

Aug-08

Aug-09

Aug-10

May-09

May-10

Nov-10

Nov-08

Nov-09

May-09

May-10

-5%

May-11

-5%

Source: Office of Economic Advisor, MSFL Research

May-11

Aug-08

Aug-09

Aug-10

Nov-08

Nov-09

Nov-10

Aug-11

Aug-11

Feb-09

Feb-10

Feb-09

Feb-10

Feb-11

Feb-11

Aug-11

Jun-09

Jun-10

Dec-08

Dec-09

Dec-10

Oct-08

Oct-09

Apr-09

Apr-10

Oct-10

Feb-09

Feb-10

Feb-11

Apr-11

Jun-11

MSFL Research
Exhibit 6: Movement across major components of Inflation (% Growth y-o-y) All Commodities Primary Articles 1. Food Articles Cereals Rice Wheat Pulses Vegetables Fruits Milk 2. Non- Food Articles Fibres Oil Seeds Minerals Fuel, Power, Light & Lubricants Coal Mining Mineral oil Electricity Manufactured Products 1. Food Products 2. Non-food mfg. products Beverage & Tobacco Textiles Wood Paper Leather Rubber & Plastic Chemicals Non-Metallic Min. Prdt Basic Metals, Alloys Machinery & Tools Transport Equip./Parts Weights (%) 100.0 22.0 15.4 4.4 2.5 1.4 0.6 1.5 1.5 4.4 6.1 1.5 2.7 0.5 14.2 7.0 5.5 1.8 63.8 11.5 52.2 1.3 9.8 0.2 2.0 1.0 2.4 11.9 2.5 8.3 8.4 4.3 13.2 10.5 9.7 4.3 0.9 7.9 8.5 3.8 11.6 2.9 4.2 12.6 12.9 9.4 7.3 1.1 7.7 7.9 3.3 10.1 2.7 2.9 6.8 10.4 4.7 5.1 0.1 4.6 4.3 2.1 7.5 2.4 2.9 5.7 -2.4 7.1 1.2 3.5 0.5 2.9 0.7 3.4 0.8 1.6 1.6 3.8 1.2 5.1 1.1 2.9 1.8 0.7 3.5 1.1 1.0 Aug-11 9.8 12.6 9.6 5.4 5.2 -1.5 -4.3 11.8 22.8 9.4 17.8 37.0 16.3 23.4 12.8 13.3 95.0 -1.3 7.8 8.0 Jul-11 9.2 11.3 8.2 5.3 2.5 1.9 -7.4 7.7 15.1 10.8 15.5 29.7 14.0 25.0 12.0 13.3 15.4 -1.3 7.5 7.6 Aug-10 8.9 16.0 15.0 8.9 8.5 10.3 9.2 -6.6 11.2 26.5 15.8 15.2 4.4 23.8 12.5 7.9 16.0 5.0 5.2 4.6 YTD 12 (Avg) 3.6 6.1 8.2 3.2 3.5 -1.8 1.1 37.5 -0.2 10.6 -5.4 -24.0 6.6 14.9 6.0 13.3 31.7 -0.3 2.0 3.7 YTD 11 (Avg) 3.5 6.9 8.0 1.3 0.7 -0.2 1.4 33.5 3.0 5.6 2.3 4.2 1.6 7.3 5.7 13.6 7.9 17.1 1.7 -1.8

Source: Office of Economic Advisor, MSFL Research

MSFL Research
MSFL Disclaimer:
All information/opinion contained/expressed herein above by MSFL has been based upon information available to the public and the sources, we believe, to be reliable, but we do not make any representation or warranty as to its accuracy, completeness or correctness. Neither MSFL nor any of its employees shall be in any way responsible for the contents. Opinions expressed are subject to change without notice. This document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. This document is for the information of the addressees only and is not to be taken in substitution for the exercise of judgement by the addressees. All information contained herein above must be construed solely as statements of opinion of MSFL at a particular point of time based on the information as mentioned above and MSFL shall not be liable for any losses incurred by users from any use of this publication or its contents.

Analyst declaration
We, Himanshu Kuriyal & Arif Dadani, hereby certify that the views expressed in this report are purely our views taken in an unbiased manner out of information available to the public and believing it to be reliable. No part of our compensation is or was or in future will be linked to specific view/s or recommendation(s) expressed by us in this research report. All the views expressed herewith are our personal views on all the aspects covered in this report.

MSFL Investment Rating


The ratings below have been prescribed on a potential returns basis with a timeline of up to 12 months. At times, the same may fall out of the price range due to market price movements and/or volatility in the short term. The same shall be reviewed from time to time by MSFL. The addressee(s) decision to buy or sell a security should be based upon his/her personal investment objectives and should be made only after evaluating the stocks expected performance and associated risks.

Key ratings: Rating Buy Accumulate Hold Sell Not Rated Expected Return > 15% 5 to 15% -5 to 5% < -5% -

Marwadi Shares & Finance Limited


Institutional Business Group, MSFL @p-sec, 306, Gresham Assurance House 132, Mint Road, Fort, Mumbai 400 001 Tel : + 91 22 2269 0474 / 75 Fax : +91 22 2269 0478 Registered Office Marwadi Financial Plaza, Nava Mava Main Road, Off 150 FT. Ring Road, Rajkot,- 360 005 Tel : + 91 281 2481313 / 3011000

You might also like