Fuel index drives inflation downwards on YoY basis| May'12 inflation remains unrevised at 7.55%

Wholesale price index based inflation stood at 6.87% during Jul’12 against market expectations of ~7.25%. Correspondingly, inflation for Jul’11 stood at 9.36% and Jun’12 stood at 7.23%. The softness in inflation was mainly driven by the continuing fall in fuel prices. Crude prices have dropped by ~7% YoY as on 29th Jul’12.

Inflation amongst the broad sub groups of manufacturing, primary articles and fuel & power stood at 5.58%, 10.39% and 5.98% respectively while their contribution stood at 54.87%, 31.64% and 13.49% respectively. Inflation in fuel group has been continuously correcting and manufacturing inflation has been in 5-6% range over the past 6-7 months. However, primary articles inflation is yet to show any correction with both food and non-food inflation hovering in double digits.

On MoM basis, the general index moved up by 0.37% against 0.18% in May’12. Manufacturing & Primary articles index surged by 0.62% & 1.11% respectively while fuel index declined 1.52%. Amongst the major subgroups, Minerals (1.36%weight)and Mineral oils (9.36%weight) declined by 3.39% & 2.27% respectively while Non-food articles (4.26% weight) rose by 2.95% on MoM basis.

While WPI index is showing some moderation, CPI is still in double digits. There serve bank kept policy rates unchanged with the primary motive of controlling inflation and anchoring inflation expectations. While other emerging economies have accelerated their rate cut cycle, India’s inflation is restricting RBI’s move to reduce policy rates. Domestic inflation is being primarily driven by crude and other imported commodity prices. Inflation outlook still seems bleak in light of the poor monsoon performance this year, rising fiscal deficit and the pricing pressure from imported commodities.