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Expert views on June inflation data
July 16, 2012 / 6:23 AM / 5 years ago

Expert views on June inflation data

NEW DELHI (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.

A vendor arranges vegetables at a market in Lucknow May 6, 2010. REUTERS/Pawan Kumar/Files

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.

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

The Sensex reversed 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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