WPI inflation holds steady.
WPI inflation remained broadly unchanged with primary articles inflation and manufactured products inflation coming in marginally lower and fuel and power inflation higher than the February prints. Going forward, there could be upside risks to input price inflation, especially if global commodity prices of crude and metals continue to harden. WPI inflation is likely to peak at 5% in June 2018 and glide down to 3.4% by March 2019. From a policy perspective, RBI MPC will continue to focus on CPI inflation. We maintain our call that the MPC would remain on a pause in FY2019.
WPI inflation remains steady even as fuel and power inflation inches higher
WPI inflation was broadly unchanged at 2.47% in March (Kotak: 2.6%; Consensus: 2.4%) after 2.48% in February. The rise in inflation was largely led by fuel inflation even as primary food inflation and manufactured products inflation softened marginally. Primary food inflation contracted sequentially for the fourth month in a row ((-)0.44% mom), backed by sequential contraction of 7.5% in vegetables, 1.5% in pulses, and 1.2% in eggs, meat, and fish. Prices of cereals increased 0.7% from last month while fruits increased 6% mom. Primary food inflation moderated to (-)0.3% from 0.9% in February (Exhibit 1). Fuel and power inflation increased to 4.7% from 3.8% in February, led mostly by an unfavorable base effect, even as sequentially petrol and diesel prices decreased by 1.0-1.3% from February levels. Average WPI inflation in FY2018 was at 2.9% against 1.8% in FY2017. We estimate FY2019 WPI inflation to average at 3.7%.
Core inflation falls marginally
Core inflation (manufactured products excluding food) fell marginally to 3.6% from 3.9% in February, even with a sequential increase of 0.3% mom reflecting the trend in global commodity prices. Heavyweights (and global prices driven segments) such as ’basic metals’, ‘machinery and equipment’, and ‘chemicals and chemical products’ witnessed sequential increases in the range of 0.5-1.5%. Going forward, we remain watchful of commodity prices which could further weigh on core WPI inflation. We estimate core inflation to trend higher through 1HCY18, peaking towards 5% in June 2018 before easing towards 3.4% by March 2019 (Exhibit 2). We estimate average FY2019 core inflation at 4.1% against 2.9% in FY2018.
RBI likely to remain on a pause for rest of FY2019
From a policy perspective, CPI continues to remain the focus for the MPC. Durable and rising core WPI inflation implies that input price inflation (especially on the back of high commodity prices) risks feeding into retail inflation over the near to medium term. We see CPI inflation for 1HFY19 to be in the range of 4.4-5.3% before easing towards 4.4% by end-FY2019, averaging around 4.5% for FY2019. The inflation trajectory faces upside risk on the back of (1) a possible increase in MSPs for kharif crops, (2) staggered impact of HRA increases by states and its second round impact, (3) fiscal slippage, (4) adverse monsoons, (5) pickup in domestic demand, and (6) higher crude prices. We maintain our call that the RBI would remain on a pause for the rest of FY2019 barring any adverse surprises to the inflation trajectory.
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