[Investors Please Listen] (WPI)-based inflation fell -1.53% Y-o-Y for the week-ended August 8 (-1.74% in the previous week),

WPI inflation rises a tad, but still at low levels

The Wholesale Price Index (WPI)-based inflation fell -1.53% Y-o-Y for the week-ended August 8 (-1.74% in the previous week), close to expectations (Edelweiss: -1.45%, consensus: -1.49%).

 

During the week ending August 8, primary articles group recorded a W-o-W growth of ~0.2%; food articles rose ~0.2% (led by ~2.6% rise in prices of fruits), while the index for non-food articles' group fell ~0.1% (led by fibres and oilseeds). The fuel group index remained fairly unchanged, while manufactured products' group rose a tad ~0.1%. Despite a W-o-W rise in the index, high base effect has triggered a steep decline in Y-o-Y inflation for the past few weeks.

 

Deficient monsoon, food prices, GoI borrowing continue to put pressure

With monsoon related pressures rising, food inflation is one of the biggest concerns the government is grappling with. Steps such as sanctioning imports and restricting exports of selected food grains, facilitating open market sale of rice and wheat, extending diesel subsidy, hiking minimum support prices and expanding the reach of NREGA, if undertaken, could ensure some comfort from the vagaries of monsoon. However, such steps could also put additional pressure on the already stretched government finances. The 10-year yield, which fell to ~5% in December 2008, has gradually risen to ~7.15% currently as at July end. We believe high government borrowing will keep the 10-year yield over 7% for most part of H2FY10, and at above 7.5% by end-March 2010.

 

Global economies in recovery mode; close watch on policy actions

With economies such as Germany, France, Japan and the US charting the onset of global recovery, policy actions (especially exit policies) by central banks to balance liquidity flows with inflationary pressures, will be closely watched.
In India, WPI inflation is likely to remain negative (Y-o-Y) till September with the lowest point being around -2%. Our view, of the WPI inflation touching 6-7% with an upside risk by March 2010 and double-digits in FY11, remains unchanged.
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