India: Inflation prints above RBI’s end-March target; nonfood inflation gathers pace

Asia Pacific Economic Research India: Inflation prints above RBI’s end-March target; nonfood inflation gathers pace WPI inflation surged to a 15-month high of 8.56%oya in January – higher than the consensus expectations (8.26%) as well as the RBI’s end-March target of 8.5% – from 7.3% in December. The overall index gained 1.1%m/m, sa from 0.8% in the prior month. However, nonfood primary articles and manufactured products were the key drivers of the WPI rise this month, unlike recent trends wherein higher food prices contributed to the WPI rise. Release of food stocks from the government’s buffer, increased imports along with expectation of a healthy winter crop helped lower the food prices. The increase in our food composite index – including primary and manufactured food articles – was thus limited to 0.2%m/m, sa as compared to the recent peak of 5.6% in November. While food prices moderated, prices of non-food primary articles like fibers, oil seeds and minerals strengthened. Even the energy index gained 2.1%m/m, sa from 1.5% in the prior month. Given that these commodities feed into the manufactured products as industrial inputs, continued high prices of these articles is likely to exert upward pressure on the manufactured products as well. Indeed, the latest print for the Markit manufacturing PMI further augments this risk, as the input price index for January surged to its all-time high since April 2005 (when the index was released). For January, the manufacturing index excluding food products increased 0.9%m/m, sa from 0.6% in the prior month. Directionally, this trend of increasing price pressure on the non-food commodity basket is expected to continue, driven by strengthening industrial activity. From here on, the movement in food prices will be determined by the output of the winter crop. Separately, the November print was revised up to 5.6%oya from the provisional estimate of 4.8%, largely driven by revision in the food price index (18.7%oya; 5.8% m/m, sa). In 1Q10, we expect the headline inflation to peak around 9.0-9.5%, driven by higher commodity prices and a weak base last year. On policy, we do not expect that today’s higher WPI print will prompt the RBI to bring forward the likely tightening. We maintain our expectation of a CRR hike of another 25bp in the April policy meeting along with a 25bp increase in the policy rates. Gunjan Gulati J.P. Morgan India Private Limited