WPI numbers for November 2013 to be released on Monday may correct to levels below CPI food, forecasts an SBI research note. If not, CPI food inflation will head higher
CPI (consumer price index) inflation jumped to 11.24% for November 2013. The jump in CPI inflation to 11.24% for Nov’13 was not entirely unexpected, as the gap between CPI food and WPI (wholesale price index) food is getting corrected, with the gap now narrowing down to 375 basis points. Hypothetically, WPI numbers for November 2013 to be released on Monday (16 December 2013) should decline, with WPI food correcting to levels below CPI food, remarks an SBI research note on inflation data.
However, if that is not the case, and WPI food declines only marginally in Nov, then a further upside to CPI may not be even ruled out, forecasts the SBI research note. The good news is perhaps a significant base impact on CPI beginning December 2013. Also, core CPI has edged down in Nov’13, implying the CPI increase has been entirely food driven.
The inflation indices divergence is shown in the following chart from the SBI research note:
According to the SBI research note, IIP (index of industrial production) growth for October 2013 has declined by 1.8%. The bad news is that the pace of growth in export oriented sectors slowed down in October 2013, notably that of apparel & leather. The most worrying aspect of the IIP data is the continued dismal performance of consumer durable sector (for the ninth straight month) with consumer durables and even consumer non-durables recording a decline of at 12.0% and 1.8% respectively.
As far as IIP numbers are concerned, SBI research analysts believe that consumer durables de-growth may have bottomed out, if the trends in CPI- household requisites price trends are an indication.
The IIP data analysis is shown in the following table:
With CPI inflation above 11%, the RBI may get aggressive with rate hikes, says Nomura
India’s industrial production (IP) growth fell to -1.8% y-o-y (year-on-year) in October 2013 from 2% y-o-y in September, worse than expected. Meanwhile, CPI (consumer price index) inflation rose to 11.2% y-o-y in November from 10.2% in October, substantially above expectations. Even as CPI inflation falls, it is expected that it will remain above 9% in 2014 as well. In this context, it is clear that stagflation persists in the Indian economy. Therefore, “we expect the Reserve Bank of India (RBI) to hike the repo rate by a cumulative 50bp, taking the repo rate to 8.25% by mid-2014,” forecasts Nomura in its research note.
According to the Nomura research note, adverse base effects, lower infrastructure output growth (especially power) and weak demand led to the decline. In particular, the slowdown was led by a sharp contraction in consumer durables (-11.8% from 10.8%) and basic goods (-1.6% from 5.3%), highlighting very weak consumer discretionary spending and bottlenecks in the upstream industries. By contrast, consumer non-durable goods continued to post positive growth likely led by a combination of strong rural and export demand. Surprisingly, capital goods also posted positive growth again.
Food price inflation rose to 14.5% y-o-y in November from 12.3% in October, led by sharp pickup in vegetable prices. While we were expecting vegetable prices to rise in November 2013, the extent of the increase is very steep. Core CPI inflation was unchanged at 8.2% y-o-y in November, above Nomura’s expectation (7.9%), point out Nomura analysts.
The Nomura research note concludes by saying that it expects GDP growth to average 4.7% y-o-y in FY14 versus 5.0% in FY13 and to rise only marginally to 5% in FY15. The recent fall in vegetable prices should lower headline CPI inflation in the coming months.
The IP data and CPI inflation data are given in the following tables of the Nomura research note:
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