economy first cut inflation_apr2012

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CRISIL EconomyFirstCutInflation: Stubborn inflation makes rate cut risky

April 2012

Overview:

WPI-based inflation remained stubborn at 6.9 per cent for the third consecutive month in March 2012, mainly as food

inflation surged towards a double-digit mark. Although core inflation indicates easing of domestic demand pressures,

higher food inflation threatens to fuel a wage-price spiral leading to persistence in high inflation. CRISIL Research

believes that it is still premature for the Reserve Bank of India (RBI) to start reducing policy rates. First, upward risks

to headline inflation remain significant. Both, food and fuel inflation are expected to remain high during 2012-13. Aweak rupee and pass-through of indirect taxes into prices could also add to inflationary pressure. Second, any pick-

up in investment growth is more reliant on easing of policy-related bottlenecks than on reduction in interest rates.

A jump in primary food inflation to 9.9 per cent, despite the decline in manufacturing and fuel inflation during March kept WPI

inflation high. Primary food inflation rose due a sharp rise in fruits and vegetable prices.

Manufacturing inflation declined to 4.9 per cent in March from 5.7 per cent a month earlier reflecting slowing domestic

demand. Non-food manufacturing inflation, the existing measure of core inflation also dropped sharply to 4.7 per cent in

March from 5.8 per cent in February.

CRISIL Core Inflation Indicator (CCII) continued to show sharp moderation in domestic demand pressures. It declined to 4.3

per cent in March, from 5.2 per cent in the previous month. Despite declining core inflation, the pressure on headline inflation

remains firm due to upside risks to food and fuel inflation.

Rate cut not warranted in April 2012 review

2.0

5.0

8.0

11.0

14.0

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Nov-11

Mar-12

%WPI yoy 3 month SA q-o-q moving average

5.00

6.50

8.00

9.50

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

%

Repo rate

Marginal Standing Facility rate

Reverse repo rate

Source: Ministry of Industry and Commerce, CRISIL Research

Inflation pressures to remain firm

The seasonally-adjusted (SA) q-o-q annualized inflation

reflects inflationary momentum going ahead. This indicator

rose to 6.4 per cent in March 2012, after declining for five

consecutive months.

Reduction in interest rates, if any, in RBIs Annual policy

review tomorrow can potentially add to inflationary

pressure.

Source: RBI


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CRISILEconomyFirstCut - Inflation

Inflation in major inflation groupsApr-Mar

(2004-05 base) Weight Dec-11 Jan-11 Feb-12 Mar-12 FY11 FY12

General 100.0 7.7 6.9 7.0 6.9 9.6 8.8

Primary 20.1 3.6 2.8 6.3 9.6 17.7 9.7

- Food articles 14.3 0.8 -0.7 6.1 9.9 15.6 7.3

- Non-Food articles 4.3 1.8 0.7 -2.6 -1.2 22.3 9.6

- Minerals 1.5 25.8 30.7 25.3 28.6 24.8 25.5

Fuel 14.9 15.0 14.6 12.8 10.4 12.3 13.3

of which

- Petrol 1.1 20.4 15.0 12.0 12.0 19.8 21.9

- Diesel 4.7 9.2 9.2 9.2 9.2 14.1 8.5

Manufacturing 64.9 7.6 6.7 5.7 4.9 5.7 7.2

- Food 9.9 6.3 5.5 5.7 5.9 3.7 7.1

- Non Food 55.0 7.9 7.0 5.8 4.7 6.1 7.3

- CCII 55.9 6.9 6.0 5.2 4.3 5.3 6.9

Source: Ministry of Industry, CRISIL Research

A new core inflation measure for India - CRISIL Core Inflation Indicator (CCII)

4.7

4.3

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

Non-food manufacturing CRISIL Core Inflation Indicator

Source: Ministry of Industry, CRISIL Research

CRISIL Research has released an alternative indicator of core inflation - CRISIL Core Inflation Indicator (CCII) which

captures underlying demand-side pressures on prices better and is more stable than the existing core inflation measure -

non-food manufacturing inflation.

For the computation of CCII, we add back processed foods and take out base metals from non-food manufacturing. Both

measures exclude prices of primary articles and fuels from the wholesale price index.

CCII significantly improves upon the current measure of core inflation. It reduces volatility by excluding base metals and

captures demand-side pressures more accurately by including processed food articles - prices of which are primarily

influenced by demand strength.

In 2012, both non-food manufacturing inflation and CCII have shown a similar trend, but the decline in CCII is sharper. CCII

averaged at 5.2 per cent in January to March 2012, compared to non-food manufacturing inflation of 5.8 per cent.


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Last updated: 31 March, 2011

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economy first cut inflation_apr2012

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