The WPI inflation after having depicted a descending trend in the last three months, inched-up yet again to 5.70% in March 2014. The data breached most poll estimates which brewed a little over 5.00%. It is noteworthy that January 2014 WPI inflation too underwent an upward revision placing the data at 5.17% as against the earlier estimate of 5.05%.
 

WPI Inflation rises yet again!

Data as on March 2014
(Source: Office of the Economic Advisor, PersonalFN Research)  

The rise in WPI inflation for March 2014 was mainly account of:

Food inflation:

The data here revealed that food articles (which have a weightage of 14.34% in WPI) snapped the descending move seen in the last three months (i.e. from December 2013 to February 2014), and shot up to 9.90% in March 2014, from 8.12% in the previous month. Moreover the data for the January 2013 stood revised to 8.85% (from 8.80%) as against the earlier estimates. The increasing inflationary pressures in vegetables attributed to the ascending move in food inflation, where prices of kitchen essentials such as onions, tomatoes and potatoes pulled up inflation in vegetables from 3.99% in February 2014 to 8.57% in March 2014.

Likewise inflation in protein based items such as egg, meat and fish also witnessed an increase to 11.19% in March 2014 from 9.69% in the previous month. So once again, this constituent of inflation landed in double-digit terrain.

Similarly prices of fruits too witnessed an increase, with inflation thereto coming in at 16.15% for March 2014 vs. 9.92% in the previous month. So this constituent saw a rather sharp increase, placing it in the double-digit terrain.

Fuel & Power inflation:
Fuel and power inflation (which has weightage of 14.91% in WPI) too, rose to 11.22% in March 2014 from 8.75% reported in the previous month. While inflation in petrol mellowed down to 5.91% in March 2014 from 6.49% in the previous month, prices of high speed diesel rose to 14.63% in March 2014 from 12.78% in the previous month.

Manufacturing inflation:
Inflation in manufactured products too crept in after remaining rather stiff in the January 2014 and February 2014. The data came in at 3.23% up from 2.76% reported in the previous month and the data for January 2014 too underwent an upward revision to 2.96% as against 2.76% in the earlier estimates. The rise in input cost seems to have attributed to the rise in this constituent of WPI inflation, amid lull in industrial activity.

PersonalFN's View on inflation:

The risk to WPI inflation emanates from food inflation. The unseasonal winter rainfall and hailstorm witnessed by some parts of the country, pose a risk due to a probable damage to rabi crop produce. Also that a possibility of an El-Nino phenomenon exists this year, if a draught or deficient rainfall is indeed reported, it could lead to prices of vegetables go up and exert upward pressure on food inflation and thereby on WPI and CPI inflation.

Thus mainly led by food inflation, CPI inflation could also be under pressure.

So, would RBI cut rates in the next monetary policy review?

PersonalFN is of the view that, that the Reserve Bank of India (RBI) would keep rates elevated until inflationary pressures recede. With core WPI inflation placed over 3.00%, and Consumer Price Index (CPI) inflation for March 2014 having come in at 8.31% as against 8.10% in the previous month, it would resist RBI from reducing policy rates. The RBI has also said in its first bi-monthly monetary policy statement for 2014-15, that only if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture. But apart from inflation, RBI's next course of policy actions may be influenced by the Government that takes charge at the centre after the results of 2014 Lok Sabha elections and what economic policies it frames.

Likewise the fiscal deficit data would be monitored carefully by the central bank. The fiscal deficit has run-up 114.3% in the first 11 months of the fiscal year 2013-14 and poses a risk of breach to the ambitious fiscal deficit target of 4.6% as well as inflicts risk of sovereign rating downgrade for the country.

Impact on equity markets...

While the rise in WPI inflation was a disappointment for the Indian equity market, it is noteworthy that the markets were trading in red even before the WPI data was announced. Possibly brewing expectations from most poll estimates, that WPI inflation may increase a little over 5.00% and profit booking led to the market perform in such a manner and final end the day's trade down 144.03 points at 22,484.93 points on the S&P BSE Sensex. While most other sectors dragged the S&P BSE Sensex down, IT and technology sector ended the day's trade in green.

Going forward, the Indian equity market is likely to keep watch on how the political landscape pans out ahead of 2014 general elections and would also take cognisance of other macroeconomic indicators both from domestic as well as global economy.

Impact on debt markets...

The Indian debt market however, wasn't enthused by the WPI inflation data for March 2014, as the 8.83% 10-Yr G-Sec yield inched up above the 9.00% mark, higher than the previous trading day's (i.e. April 11, 2014) close of 8.94%. The yield had earlier during the month fallen due to relatively stronger rupee and narrowing trade deficit data.

Going forward, the core WPI inflation data and the fiscal deficit number would provide guidance to debt markets.
 

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