July 16, 2012 / 6:18 AM / 5 years ago

INSTANT VIEW 5-India's June inflation at 7.25 pct y/y, below forecast

(Adds comments, key points)
    NEW DELHI, July 16 (Reuters) - India's wholesale price index (WPI)
 rose a lower-than-expected 7.25 percent in June from a year earlier,
mainly driven by higher food prices, government data showed on Monday.
    Analysts on average had expected an annual rise of 7.62 percent, a Reuters
poll showed. Wholesale prices provisionally rose 7.55 percent in May.
    The annual reading for April was upwardly revised to 7.5 percent from 7.23
percent, the government said in the release. 
 
    KEY POINTS:        
    -----------------------------------------------------------   
    SUB INDEX          (WEIGHTING)  JUNE   May   Pct change     
    PRIMARY ARTICLES      20.12     216.4  216.1  +0.1 
    Food Articles         14.34     209.2  206.3  +1.4  
    FUEL AND POWER        14.91     178.2  178.9  -0.4 
    MANUFACTURED PRODUCTS 64.97     144.8  144.3  +0.3 
    ------------------------------------------------------------  
    NOTE: Articles in CAPITALS are sub-indexes. Articles in    
    lower case are specific categories within the sub-indexes.   
    ------------------------------------------------------------
    
    COMMENTARY
    DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG
    "This is the lowest reading since December 2009 (except the one-off drop in
January this year).
    "The unexpected slowdown of inflation is fantastic news, despite the still
elevated level: it opens the door for a rate cut already in July, and we expect
a 25 bps move at the RBI meeting at the end of the month. 
    "As a result, we see a decline in INR OIS rates and government bond yields
today. The INR should extend gains on hopes that monetary easing will boost
growth, and on inflows into bond market by foreign investors."
    
    RADHIKA RAO, ECONOMIST, FORECAST, SINGAPORE
    "Prima facie, softer-than-expected inflation print after downward revision
in historical industrial production ups the scope of a rate cut at the late-July
review. The decision will be a close call as inflation still holds above 7.0
percent, well above RBI comfort levels, thereby complicating the rate direction.
    "With an eye on central bank rhetoric, we think the policymakers might tap
on the available window to ease rates further, especially after the regional
central banks have also resumed the rate-cutting cycle. Liquidity conditions
have also stabilised since the beginning of July thereby lowering scope for a
CRR cut."
    
    SURESH KUMAR RAMANATHAN, HEAD OF REGIONAL RATES AND FX STRATEGY, CIMB, KUALA
LUMPUR
    "I still maintain the view of no change in rates. The easing seen in
inflation is a reflection of the slowdown in the economy which is hurting price
pressures as also the easing of some domestic demand. The first quarter economic
growth would be slightly softer than widely expected. Probably going forward the
inflation could ease as the economy is slowing much faster than expected. We
have not seen decent inflows into the market either and we could see some
flattening in the back-end of the OIS curve."
    
    V.K. VIJAYAKUMAR, INVESTMENT STRATEGIST, GEOJIT BNP PARIBAS, COCHIN
    "An area of concern is food inflation which has inched up, and more
importantly there are concern on the monsoon front. More that one-third of the
monsoon is over and there is very severe deficiency.
    "To anchor inflationary expectations RBI will continue its tight stance. It
would be unrealistic to expect a decline in interest rates on July 31.
    "The stimulus to growth has to come form the government, not from the
monetary side." 
    
    RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
    "Even though inflation number has come below the consensus expectation,
sizeable revisions in the past numbers have reduced the credibility of
provisional data.
    "With food inflation at 10.81 percent, and core inflation at 4.85 percent,
nothing has changed materially on the inflation front. The RBI will now see what
happens from the fiscal side post the presidential elections before giving any
signal."
    
    SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
    "I do not expect this number to prompt the RBI to immediately cut rates. The
inflation expectation still remains elevated, and the outlook is cautious
because of the performance of monsoon, and its impact on food prices, as well as
the impending and much awaited hike in fuel prices."
    
    SONAL VARMA, EXECUTIVE DIRECTOR AND INDIA ECONOMIST, NOMURA, MUMBAI
    "The WPI data is better than expected but the monsoons and high fuel prices
still remain a concern. We don't think this will affect the RBI policy decision
on July 31. We see the core inflation at around 4.9 percent."
    
    ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, IN NEW DELHI
    "At this stage, the data does not give the RBI enough room. We saw the April
number being revised up. We have just seen one data point showing a decline,
whether it is sustainable or will it perk up again, is an open question. The RBI
would wait to see a clear pattern emerge ahead.
    "Food inflation is still high and will have a pass-through effect on the
consumer price inflation. And, the RBI wants some action on the fiscal side. For
the July policy, it will sort of hold on rates.
    "There are some administrative hikes due, and food prices could move up, we
could see inflation averaging around 7.5-8.0 percent for the year."
    
    NITESH RANJAN, ECONOMIST, UNION BANK OF INDIA, MUMBAI
    "Global indicators are pointing towards continued softness in crude oil and
food prices. In fact, FAO's food price index has fallen for three consecutive
months to 22-month low. On this, 7.25 percent WPI and stable core inflation
below 5 percent is positive for the market.
    "However, having seen RBI's last policy statement easing of rates may wait
until there is definite downtrend in headline as well as core numbers and
government takes some measures on diesel price pass-through. At this point,
possibility of a rate cut by RBI is much less than maintaining a status quo."
    
    D.K. JOSHI, PRINCIPAL ECONOMIST, CRISIL LTD, MUMBAI
    "There's not much comfort from the inflation reading. The inflation momentum
going ahead depends on exchange rates, and commodity prices. On the domestic
front, there is enough pressure because fuel prices need revision, so I see
upward pressure on inflation, at least over the next couple of months. And, I
expect status quo on rates from the Reserve Bank of India in its July 31 policy
review." 
    
    JONATHAN CAVENAGH, SENIOR FOREX STRATEGIST, WESTPAC, SINGAPORE
    "Any sign that inflation pressures are easing in India is welcome by the
market as (in theory at least) it gives the RBI more room to potentially cut
rates in the period ahead.
    "USD/INR has fallen in the aftermath of softer inflation data, with the 1
month NDF slipping back to the 51.10/15 level."
    
    A. PRASANNA, CHIEF ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD,
MUMBAI
    "My suspicion is that data on electricity is not getting updated because we
have not seen tariff hikes getting reflected in it. 
    "The headline number is artificially suppressed. All said and done, the
manufacturing inflation rate is still 5 percent, and there's no further
improvement in the core inflation, which is around 4.8-4.9 percent, which is
where it has been in the last three months. 
    "I don't see momentum on the lower side for headline inflation in the coming
months. I expect the Reserve Bank of India to keep status quo on rates on July
31."
    
    SAUGATA BHATTACHARYA, ECONOMIST, AXIS BANK, MUMBAI 
    "The lower-than-expected headline inflation number definitely increases the
case for a rate cut given the lower manufacturing activity, dip in car sales and
other economic activities, but it will still be contingent on whether the
government takes reform steps like diesel price decontrol and other measures for
fiscal consolidation."
    
    SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
    "The lower-than-expected print is encouraging with manufacturing inflation's
sequential fall during the first quarter. The quantum of diesel price hike
coupled with weekly monsoon progress would drive the near-term inflation
direction.
    "With core inflation below 5 percent and nearly stable at around 4.86
percent over the previous month coupled with the transmission lag in the rate
cut, we expect the central bank might go for a symbolic 25 bps rate cut in the
forthcoming policy meet."
    
    SUJAN HAZRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
    "Despite the unexpectedly low number, the headline inflation is way above
the Reserve Bank of India's comfort zone. Hence, the case for easing of monetary
policy is not there. The focus of the RBI will remain on improving liquidity."
    
    MARKET REACTION
    Shares reverse direction to be up 0.2 percent from down 0.1 percent
ahead of the data.
    The rupee strengthened further to 54.89 per dollar from 54.96
before the data.
    Benchmark 10-year bond yield fell as much as 6 basis points
on day. The benchmark five-year swap rate was down 4 bps at 6.90
percent, and the one-year swap rate dropped 5 bps to 7.50 percent
post the data.
     
    BACKGROUND
    - Industrial output picked up more than expected in May, bolstering the case
for the central bank to keep interest rates high at its next policy meeting as a
slow start to the monsoon puts pressure on inflation, especially food prices. 
    - The nearly $2 trillion economy expanded 5.3 percent in the March quarter,
its slowest pace in nine years, on a combination of mounting global
uncertainties, muddled policies, high inflation and steep interest rates at
home. 
    - Factories stepped up production and hired workers in June at the fastest
rate in more than two years, a business survey showed. 
    - Car sales in June grew 8.3 percent from a year earlier, but were the
lowest in numbers since October last year, forcing the auto industry to lower
the sales target for the current fiscal year.
    - Headline inflation accelerated in May to 7.55 percent as both food and
fuel prices picked up. Consumer price inflation, which is an indicator of retail
price rises, was unchanged at 10.36 percent in May. 
    - Monsoon rains were above average for the week ended July 11 for the first
time in the current season as the downpours resumed after a worrying
fortnight-long pause over the central part of the country. The annual rains are
crucial for farm output and economic growth as about 55 percent of the South
Asian nation's arable land is rain-fed. 
 (Reporting by India Treasury Team; Editing by Ranjit Gangadharan)

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