WPI Inflation for Nov'13 rises again. A rate hike appears certain!   Dec 16, 2013

The WPI inflation for the month of November 2013 mounted yet again, placing the data at 7.52%. Moreover, there seem to be an uptrend formed signalling inflationary pressures creeping in. This inflation data for November 2013 is worrisome as it has risen to a 14-month high surpassing most poll estimates. Moreover, the data for September 2013 was revised upwards to 7.05% (from the earlier provisional data of 6.46%) and such upward revisions have been repeatedly seen in the past.

WPI Inflation inches-up again!
WPI Inflation for November 2013
Data as on November 2013
(Source: Office of the Economic Advisor, PersonalFN Research)

The ascending move in WPI inflation for November 2013 was mainly account of:

Food inflation:
The data here revealed that food articles (which have a weightage of 14.34% in WPI) rose to a striking 19.93% in November 2013 from 18.19% in the previous month. The inflationary pressures here were mainly attributed by increase in prices of vegetables, where onions and tomatoes were costly with their inflation in the month of November 2013 standing at 190.34% and 178.00% respectively on a year-on-year basis. The overall prices of vegetables in general, largely increased to 95.25% in November 2013 from 78.38% registered in the previous month making life difficult for the common man.

Non-Food article inflation:
Non-food articles (which have a weightage of 4.26% in WPI) which consist of fibre, oil seeds and minerals, also inched-up to 7.60% in November 2013 from 6.79% in the previous month. Thus the ease in this segment which was seen in a few earlier months (May, July and August 2013) too was disturbed.

Fuel & Power inflation:
Fuel and power inflation (which has weightage of 14.91% in WPI) once again rose to 11.08% in November 2013 from 10.33% in the previous month. The earlier increase in price of fuel along with yet elevated levels of international crude oil price (placed over U.S. $100 per barrel) and depreciated rupee, reflected in this constituent of WPI inflation.

Manufacturing products inflation:
The data here also revealed that prices of manufactured products (which have a weightage of 64.97% in WPI), also inflicted some inflationary pressures. The data for November 2013 came in at 2.64%, ascending from 2.50% registered for the month of October 2013. Thus manufacturing inflation too seemed to have brought in some inflationary pressures; but it seemed that base effect too striding the data.

PersonalFN's View on inflation:

While monsoon has been above normal, it has done damage to vital kharif crops due to which we are witnessing rise in price of food articles. Therefore food inflation may inflict inflationary pressures going forward due to escalation in prices of vegetables. Moreover, increase in price of diesel - which is an essential transportation fuel - and cooking gas (LPG) is likely to put pressure on food inflation and fuel & power inflation.

The manufacturing inflation may remain benign with yet docile industrial activity.

So, would RBI cut rates in its 3rd mid-quarter review of monetary policy 2013-14?

PersonalFN is of the view that, inflationary pressures are yet evident and such a scenario would remain for at least a couple of months now. As seen above, strikingly high double-digit food inflation perseveres to be a major cause of concern. In fact, Dr Rajan has described food inflation as "worryingly high". Going forward too, food inflation is likely to remain high due to escalation in prices of vegetables. Moreover, increase in price of diesel - which is an essential transportation fuel - and cooking gas (LPG) is likely to put pressure on food inflation. Fuel and power inflation is already seeing pressures as reflected by rise in data for November 2013 over the previous month. Also, the recently released Consumer Price Index (CPI) inflation for the month of November 2013 has mounted further in the double-digit terrain to 11.24% from 10.09% in the previous month.

So the Reserve Bank of India (RBI), in our view would be very vigilant about such a situation and may increase policy rates, although the movement of Index of Industrial Production (IIP) is rather stagnant and range-bound.

While the Indian rupee has remained weak against the greenback in the last few days, Dr Rajan seems to have allayed fears on the rupee recently. The Current Account Deficit (CAD) is expected to be around 3% as per the estimates of RBI. Falling CAD would take the pressure off the Indian Rupee. But fiscal deficit, which has already run up to 84% of the budgeted full year target in just six month of the current fiscal year, seems to be an area of concern. Rating agencies are already signalling concern over fiscal deficit problem and if any further slippage on this takes place, it may not be viewed favourably by rating agencies.

Under the backdrop of inflationary pressures and concerns of the fiscal deficit front, PersonalFN is of the view that the central bank would maintain its anti-inflationary stance and may increase policy rates by another 25 basis points (bps) in its 3rd mid-quarter review of monetary policy 2013-14 scheduled on December 18, 2013.

Impact on equity markets...
Although markets expect growth to remain sluggish, the double digit consumer price inflation and high Wholesale Price Inflation may dampen the sentiment. Further, likeliness of a rate hike at 3rd mid-quarter review of monetary policy 2013-14 may negatively affect the market movement to an extent. Speculation about tapering of stimulus package in the U.S. may put pressure on markets. PersonalFN believes that investors shouldn't get carried away by the rally that has happened. Staggered investment approach might help investors beat volatility. Investing through Systematic Investment Plans (SIPs) offered by the mutual fund is advisable.

Impact on debt markets...
Weak industrial growth may not discourage RBI from hiking policy rates at 3rd mid-quarter review of monetary policy 2013-14 as consumer price inflation and wholesale price inflation has been ascending. Bond prices may fall and yields may rise if RBI hikes rates. The fiscal deficit has already exhausted 84% of its limit set for the Financial Year (FY) 2013-14. Higher deficit would put pressure on bond yields. PersonalFN is of the view that investors would be better-off avoiding any speculation pertaining to interest rate movement. We believe that one shouldn't invest more than 20% of one's portfolio in long term debt funds. Going forward, the shorter end of the yield curve appears to be more beneficial than the long end of the yield curve.

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