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WPI inflation at record high of 7.4% YoY in Mar’21…

…due to broad-based rise in inflation and low base effect

* WPI inflation stood at a record high of 7.4% YoY in Mar’21 (since the new series began in 2012), against 4.2% in Feb’21 and minor inflation of 0.4% in Mar’20 (Exhibit 1). The number is higher than both the market consensus of 6.2% and our forecast last month of 5.4% WPI inflation. However, WPI inflation for the full-year FY21 stood at a five-year low of 0.8% YoY v/s 1.7% YoY in FY20 (Exhibit 2).

* While such a high swing in WPI inflation was broad-based, this was also due to the low base of Mar’20 – when the government had imposed nationwide lockdown, leading to a relatively low response rate in the computation of the WPI index.

* Surprisingly, inflation in fuel and power was at a 28-month high of 10.2% YoY (WPI weight: 13.2%), against 0.6% YoY in Mar’21; deflation was seen in all the months before that in FY21.

* Additionally, food (both primary articles and manufactured food items), accounting for ~25% weight in the WPI basket, rose to a five-month high of 5.3% YoY in Mar’21 v/s 3.3% in Feb’21 (Exhibit 3).

* Primary articles (WPI weight: 22.6%) registered 13-month high inflation of 6.4% YoY in Mar’21, against 1.8% in Feb’21, driven by food articles, minerals, crude oil, and natural gas.

* Manufactured products (WPI weight: 64.2%) posted the highest inflation of 7.3% YoY in Mar’21 (since the new series began in 2012), compared with 5.8% in Feb’21, on higher inflation in food, textiles, wood and wood products, paper and paper products, chemicals and chemical products, basic chemicals, fertilizers, rubber and plastic products, fabricated metal products, computer electronic and optical products, and machinery and equipment, among others (Exhibit 4).

* Core (non-food manufactured products) WPI inflation also came in at a record high of 7% YoY in Mar’21 v/s 5.5% in Feb’21 (Exhibit 5). This is similar to the trend seen in core CPI inflation last month, indicating rising commodity prices at both the wholesale and retail levels.

* Overall, we expect CPI-based inflation (the RBI’s monetary policy anchor) to ease to less than 5% in Apr’21 and IIP to grow ~20% in Mar’21, primarily led by the very low bases of Apr’20 and Mar’20. On an annual basis, we expect CPI to avg. 4.7% YoY in FY22 (v/s 6.2% YoY in FY21) and IIP to grow 11% YoY in FY22 (v/s expected decline of 8.7% YoY in FY21).

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