Food Inflation Continues to Drive WPI Inflation

Wholesale Price Index (WPI) inflation came in at 0.3% in April 2016 as against India Ratings and Research's (Ind-Ra) expectation of negative 0.4%. WPI has turned positive following 17 consecutive months of negative growth. WPI based inflation entering into positive territory though was anticipated, it came a month or two earlier than Ind-Ra's expectation.

Like Consumer Price Index, once again the key driver of WPI inflation for the month of April was food inflation. Pulses continue to be the sore point so far as food inflation is concerned. At 36.4% in April 2016, pulses inflation has remained in excess of 30% now for 11 consecutive months. Another disturbing feature of April WPI data is the double-digit inflation in potato and sugar. Inflation in both these items was in a moderate single-digit a month ago. In fact, potato was witnessing deflation till February 2016 and sugar till January 2016. A spurt in potato and sugar prices in April 2016 shows that the aberration in the prices of select agricultural commodities from time to time due to supply shocks can be quite destabilising for inflation and inflationary expectation in India, making management of food inflation a much more challenging job than previously believed. Food inflation rose to 4.2% in April 2016 from 3.7% in March 2016. Deflation in fruit and vegetable prices moderated to 0.5% from 2.2% in the previous month. Vegetable prices rose to 2.2% in April 2016 from negative 2.3% in March 2016. Manufactured food products inflation increased to 8% in April 2016 from 4.5% in March 2016.

Ind-Ra, therefore, believes a rate cut in the Reserve Bank of India's June 2016 policy review is ruled out. Although the agency still expects at least one more rate cut this fiscal, this will be contingent upon the monsoon and how it plays out.

Manufactured products inflation increased to 0.7% in April from negative 0.1% in March 2016, after 13 months of consecutive contraction. So far as the return of manufacturing inflation to positive territory is concerned, it is still early to believe that this is indicative of the return of pricing power for the manufacturing sector. We may have to wait for a trend to emerge on this account. However, core inflation (non-food manufactured products) came in negative at 0.8% as against negative 1.1% in the previous month. Some of the major manufactured items/groups that posted positive price growth in April 2016 are machinery and machine tools (0.1% in April from negative 0.1% in March 2016). Deflation in basic metals, alloys, and metal products moderated to 4.6% in April 2016 from 5.4% March 2016.

Deflation in fuel and power component of WPI continued for the 18th consecutive month. However, deflation in fuel and power prices moderated to 4.8% in April 2016 from 8.3% in March 2016. The contraction in petrol prices moderated to 4.2% in April 2016 as against a contraction of 9.9% in the previous month.

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