Inflation moderates to 7.3% YoY

India’s Wholesale Price Index (WPI) inflation in June 2012 moderated to 7.3% from 7.6% in the previous month, lower than consensus expectation of 7.6% but still above 7.0%. The moderation was primarily on account of a YoY moderation in fuel and power inflation (from 11.5% in May 2012 to 10.3% in June 2012). Despite the moderation in WPI inflation, food inflation remained at an elevated level of 10.8% compared to 10.7% in May 2012. Meanwhile, the April 2012 inflation number has been revised upwards, from 7.2% to 7.5%. Inflation in June 2012 was down 60bps and 30bps from Nirmal Bang's estimate of 7.9% and consensus projection of 7.6%, respectively, but considering the upward revision in inflation figures for March and April 2012 a similar revision cannot be ruled out for July 2012 as well. Nirmal Bang expects headline inflation at 7.4% in July 2012 and at 8.5% in FY13.

In June 2012, primary articles (weight 20% in WPI) contributed 2.1% to inflation, while despite the moderation in global commodity prices the manufactured products (weight 65% in WPI) contributed 3.3%. While the prospects of a poor monsoon have already posed a threat to overall farm production, the Cabinet Committee on Economic Affairs (CCEA) raised the minimum support prices (MSPs) for kharif crops on 14 June 2012 to protect the farmers from global price swings and also to ensure adequate supply to the government’s subsidised food programmes. The hike in MSPs leads to higher inflation in primary commodities, whose prices are already at a high level. While core inflation witnessed moderation, the potential impact of the lagged pass-through of rupee depreciation has suppressed inflation in energy and fertiliser segments, which could lead to a sharp spurt later on.

Food inflation soars to 10.8%

Food inflation surged to 10.8% in June 2012 from 10.7% in the previous month due to rise in the prices of rice and pulses. Inflation in rice and pulses soared 7.5% and 20.5% in June 2012 from 5.1% and 16.6%, respectively, in the previous month. Vegetable inflation stood at 48.8% in June 2012 compared to 49.4% in the previous month while fruit prices contracted 3.6% in June 2012 compared to a contraction of 6.1% in May 2012. Milk inflation moderated to 7.3% in June 2012 from 11.9% in the previous month, primarily due to a high base.

Inflation in non-food articles moderated to 6.9% in June 2012 from 8.5% in the previous month due to a fall in fibre prices. Primary article inflation stood at 10.5% YoY in June 2012 compared to 10.9% in May 2012.

Fuel and power inflation

Fuel and power inflation moderated to 10.3 % in June 2012 from 11.5% in the previous month because of a fall in international crude oil prices. Inflation in the mineral oils group moderated to 10.9% in May 2012 from 12.8% in the previous month due to a decline in the prices of aviation turbine fuel and furnace oil. Petrol prices surged 13.1% in June 2012 compared to 10.5% in the previous month following an upward price revision by oil marketing companies.

Inflation still at 5% in manufactured products

Inflation in manufactured products was flat at 5.0% in June 2012 compared to the previous month, despite a fall in the prices of basic metals and textiles. Textile inflation contracted 1.6% in June 2012 from a contraction of 3.5% in the previous month. Inflation in chemicals stood at 6.9 % in June 2012 compared to 6.8% in May 2012 due to high prices of fertilisers and pesticides. Inflation in basic metals moderated to 9.8% in June 2012 from 10.3% in the previous month on account of falling global commodity prices. Inflation in machinery and transportation segments stood at 2.2 % and 3.7 % in June 2012 compared to 2.2% and 3.7%, respectively, in the previous month.

Inflation expected to rise in second-half of FY13

Despite a falling rupee, significant contraction in the prices of crude oil and other commodities helped core inflation to moderate from 6.7% in January 2012 to 5.0% in June 2012. In the wake of increased prospects of a deficient monsoon, Nirmal Bang expects food inflation to increase further due to the gap between demand and supply widening. Following rising subsidy burden, Nirmal Bang expects an upward revision in diesel and liquefied petroleum gas prices after the presidential poll. Taking into consideration, the likely hike in diesel and fertiliser prices in the second-half of FY13, they expect headline inflation at  8.5% in FY13.