Food softening and manufactured products prices hardening continued in Feb '11; inflation continues way ahead of expectations. Yet, due to softer growth (IIP, GDP, investment), the RBI is likely to limit the rate hike to 25bps on 17 Mar '11.
n WPI inflation edges up. Beating market and our expectations (7.7%), headline inflation based on the wholesale price index (WPI) rose to 8.3% in Feb '11, continuing above 8% for the 14th consecutive month. Dec '10 WPI inflation was raised to 9.4%, from 8.4% earlier.
n Manufactured products driving inflation up. Though the index of primary articles (weight: 20%) declined 2.9%, m-o-m, in Feb '11, the index for manufactured products (weight: 65%) surged 1.3%, the highest monthly increase since Apr '10. The annual manufactured products inflation also rose, to 4.9%, after softening to 3.8% in Jan '11. Notably, non-food manufactured inflation saw a sharp jump, from 4.9% in Jan '11 to 6.1% in Feb, the highest since Nov '08.
n Non-food primary articles on fire. Prices of non-food articles (weight: 4.3%) have been rising sharply in the last six months (average 3.1% m-o-m) due to higher prices of castor seed, raw cotton and copra. Annual inflation for this category rose to 29.8% in Feb '11, remaining above 20% for six successive months.
n Inflation assessment and outlook. Prices of food articles have started softening considerably since end-Jan '11 and the trend is likely to continue for the next 2-3 months on account of better prospects for the rabi crop, which would hit the markets in early April. Manufactured product inflation, however, has started inching up, reflecting the pass-through of high commodity prices, rising interest and wage costs. This, in turn, is expected to keep overall inflation elevated during most of FY12. We see clear upside risks to manufactured product inflation in the next 2-3 months, beyond which such prices should stabilize.
n Policy outlook. Low industrial production and investment growth on the one hand and unrelenting inflation on the other are rendering the outlook for monetary policy uncertain. We expect the RBI to raise both the repo and reverse repo by 25bps each and to discontinue the temporary dispensation extended on the holding of securities under the Statutory Liquidity Requirement.
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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