India's wholesale price index (WPI)-based inflation rose 0.3% in April from 0.9% a month ago, returning to a positive territory after remaining in deflation for 17 months. However, Nomura feels that owing to rising costs amid still-subdued domestic demand, profit margins could come under pressure.
"Indeed, a breakdown of the WPI into input and output prices shows that the majority of the pick-up was driven by higher input costs (food, fuel and commodities), which accelerated to -0.5% from -2.1% in March. Output price inflation also rose, but marginally to 1.7% from 1.3%, indicating that producers in select segments also passed on higher input costs to consumers," it said in a research note.
According to Religare Capital Markets Ltd the turnaround was on due to a surge in food product inflation (led by sugar) – core WPI stayed in the negative zone, at -0.8%. "Given that the deflation in global commodity prices is moderating, we expect the WPI to continue to edge up – this is positive for a recovery in nominal growth," it added.
WPI food price inflation (primary plus manufactured) rose 5.4% in April from 4.0% in March, while core WPI (WPI manufactured ex-food) deflation eased to -0.8% from -1.1%.
The uptick in April was driven by three factors, food prices, higher global commodity prices and better domestic demand, Nomura says.
1. Food prices sequentially rose sharply led by a pick-up in the prices of pulses (4% m-o-m), vegetables (4.7%) and manufactured food such as sugar (8.4%) and tea and coffee (12.9%). Although fruit and vegetable prices typically rise during the summer months, the pick-up in the case of vegetables was stronger than a year ago, driving up y-o-y food price inflation.
2. Higher global commodity prices pushed up the prices of fuel (aviation turbine fuel, bitumen, petrol), primary non-food articles (oilseeds and fibres) and select manufactured products (basic metals and chemicals).
3. Better domestic demand pushed up the prices of cement, beverages & tobacco and wood products. However, we do not view demand-side pressures as broad-based, as segments such as paper and leather products witnessed sequential price declines.
According to Religare, the deflationary spell in the Indian economy was largely driven by a sharp fall in global crude oil and metal prices. Ex-crude oil, mineral oils and metals, WPI stood at 2.4% in April 2016 and has remained positive in 15 of the last 18 months. "Given moderating deflation in international commodities, we expect WPI to continue to rise in the near term – positive for nominal GDP growth," the report concluded.