Inflation After Effects

Praveen Bajaj — Wed, 16 Dec 2009 13:15:39 +0000

India’s WPI inflation rose by 4.78% y-o-y in November compared to1.34% in October. 4.20%. It was more than the Bloomberg consensus street expectations of around 4.2%. This was mainly on account of higher manufactured product prices which has a weight of around 63% on the index. This I believe is a clear signal of a rise in the core inflation.

The manufactured products rose a whopping 1.25% (mom) compared to a mere 0.5% average rise for the period of Jan-Oct (2009).

Rising global commodity prices are pushing up input cost pressures, beyond just food prices.
With demand picking up as well, we expect firms to have a greater ability to pass-through higher costs.
Thus, apart from the earlier prevailing supply side effect, a demand side effect on the inflation is also posing a strong threat.

The drought affected rise in food prices was one of the key inflation drivers over the last few months, however now with manufacturing also joining in could take the inflation to the upper band of the RBI’s forecast of around 8%. Thus I strongly believe that a policy action by the RBI is imminent. A CRR hike even before the next credit policy meet at the end of January is on the cards if the inflation figure crosses the 6% mark in the beginning of the January.

Hence, one should take a cautious view on the markets in general and rate sensitive banking, real estate, infrastructure and engineering stocks in particular

Author: Rahul Sonthalia, Analyst, Kredent Group

Money Bol » inflation rate

Inflation After Effects