MUMBAI (Commodity Online): Macquarie maintains their base case assumption of one more 25bp hike in the policy rate in the next mid-quarter review of monetary policy on September 16 to be conducted by India’s central bank; The Reserve Bank of India.
The RBI in the last monetary policy in July clearly indicated that a change in stance will be motivated by signs of a sustainable downturn in inflation.
RBI measure of “core” inflation has remained high in August. Also while the global growth environment has deteriorated, the global commodity prices have remained high. Giving weight to RBI's stance to control inflation at the cost of growth, Macquarie believe one more hike in policy rates seems plausible.
In fact, Macquarie expects headline inflation (WPI) to remain sticky in FY12 and average around the 9% YoY level. On the monthly trend, Macquarie expects headline inflation to remain high over the next 2-3 months and moderate to around 8% YoY in December 2011.
“We expect inflation to reach near the 7-8% YoY range as of end-March 2012.” Macquarie said in a briefing.
WPI inflation for August came in at 9.78% YoY, above consensus expectation (as per Bloomberg survey) of 9.64%. This compares with 9.22% YoY registered in July. The data for the month of June was also revised upwards to 9.51% YoY from 9.44% YoY reported earlier. Headline WPI inflation has remained above the Reserve Bank of India’s comfort zone for the past 21 months, averaging 9.5% during this period.
Non-food manufactured inflation, an indicator that RBI tracks as a measure of core inflation, accelerated to 7.7% YoY in August from 7.5% YoY in the previous month. Indeed, this measure of core inflation has now accelerated to above 7% YoY over the past 7 months compared to an average of 5.3% YoY over the previous 12 months, indicating a spill-over of supply shocks to generalised inflation through the input cost channel as well as the inflation expectations.
The pick-up in non-food manufactured inflation in August was driven by higher prices of basic metals, alloys & metal products (11.6% YoY vs. 10.1% YoY in July), transport, equipment & parts (4.2% YoY vs. 2.9% YoY in July) and chemicals & chemical products (8.5% YoY vs. 7.9% YoY in July).
Food inflation (primary plus manufactured) accelerated to 9.1% YoY from 8% YoY in July driven by higher prices of fruits and vegetables. Non-food inflation also picked up further to 10.1% YoY in August (vs. 9.7% in the previous month).
