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Charts & Analysis

WPI Inflation Jumps to 5.79% Which Still Looks Too Low

Even as CPI inflation was close to 10%, the wholesale price index based inflation for July 2013 came in at 5.79%, much higher than last month’s 4.86%.

Monthly WPI and Inflation

The cause for worry is that the green line above has resumed its upward movement and that inflation continues to creep up.

Component wise, Primary Articles have gone up 9% and fuel is up 11% (largely on rupee depreciation). Manufactured goods is at a slightly difficult-to-believe 2.81% and it carries the biggest weight in the index.

Inflation Components July 2013

Revisions: May 2013 has been revised marginally down from the first announced 4.7% to 4.58%.

Impact: This should definitely cause the RBI to not want to reduce rates. Raghuram Rajan, the next governor is more focussed on inflation than growth, and it’s even likely he will raise rates. In any case, short term rates (which is what the RBI controls) are way too low – even call and CBLO rates are at 10%+. However, a rate increase is negative for banks because it might be a retracement of the rate cut trend started last year.

The other impact is that GDP growth will hurt with this kind of inflation. When prices rise and incomes do not, then the only choice is to cut discretionary spending. If you notice the IIP closely, there is absolute carnage in the “Consumer Durables” section of the IIP, it is down between 10% and 18% in the last two months. Auto sales have been down a while now. Consumer durables and cars are largely non-essential items, and the cuts in their demand point to inflation hurting discretionary consumption, the first to bite.

I believe along with the liquidity squeeze, high inflation will be negative for stocks in the near term. But this doesn’t apply to pharma and IT, and of course in cases where stocks have been battered so much you kind of wonder if there’s a serious crisis you didn’t know about.

  • Leo says:

    Yes i like the last line “I believe along with the liquidity squeeze, high inflation will be negative for stocks in the near term. But this doesn’t apply to pharma and IT, and of course in cases where stocks have been battered so much you kind of wonder if there’s a serious crisis you didn’t know about.”
    This is true ther eis a crisis looming and it is big .if u see external debt in the last 4 years has gone up like double the amount from 1950 to 2007 .That is a huge jump
    Rates have to be raised due to currency panic second if u raise rates ur debt external goes up.
    Strong currency can have good exports but economists think otherwise.
    SEE germany best machines are made in germany mercedez audi bmw.
    We are loaded on debt which cant be paid .and our guys piling on debt
    once 61.48 odd in it will take of to 70+
    which will be trigger point for china too dancing around 2000 area fighting back but lets see how it plays can they kick the can down the road live to die another day.
    GOLD btw who think is coz of inflation are wrong it is going up coz govt debt blowing up soon (indcluding india- all the story of india is insulated is all rubbish)
    I wish we had spent money on agriculture and we would have been in safer spot than buying SUVs and all .ONe bad policy after another .

  • Kaushik says:

    Hi Deepak what is your take on OMCs and upstream companies like CAIRN and ONGC. Are they still maintaining their margins or getting into the sucking whirlpool vortex.

  • Vidyanshu says:

    Hi Deepak, RBI is just announcing capital controls and further controls on gold. Which can only worsen the situation. I think Rupee is going to badly battered. Subbarao is taking an approach of not on my watch…but post Subbarao someone will have to bite the bullet. Your thoughts?
    Vidyanshu.