India's WPI Index For June Declines To 7.25 Percent; Food Price Index Continues Its Double Digit Increase

The WPI data released by the Government Monday shows that inflation decreased to 7.25 percent in June, 2012, from 7.55 percent, which was at its highest this year in May. Analysts, on average, had expected an annual increase of 7.62 percent, according to a Reuters poll report.

Build up inflation in the financial year so far was 1.99 percent, compared to the 2.41 percent in the corresponding period of the previous year.

Food prices drove the WPI index in the month of June as the inflation of food articles remained in double digits at 10.81 percent, marginally higher than the 10.74 percent in May.

Data released by the Ministry of Commerce and Industry show that primary articles which weigh 20.12 percent on the index rose by 0.1 percent to 10.46 percent or 216.4 points from the previous month. Major contributors to the inflation index in this group were the prices of poultry chicken and gram that have increased by 6 percent and 7 percent, respectively.

The index for non-food articles group declined by 2.6 percent to 193.5 percent in the same period. The minerals index in the primary articles group declined by 2.6 percent to 347 points from 357.0 for the previous month, due to a sharp fall in gaur seed prices by 28 percent and logs and timber by 9 percent.

The fuel and power group with 14.91 percent weightage on the index decreased by 0.4 percent to 178.2 from 178.9 from May, due to the lower prices of light diesel oil (7 percent) and aviation turbine oil (6 percent each). Petrol prices went up by 7 percent.

The manufactured products group, weighing 64.97 percent on the index, rose 0.3 percent to 144.8. Under the group, food products increased 0.2 percent, beverages 0.7 percent and textiles 0.7 percent.

The government has revised the April inflation data to 7.5 percent from the previously reported 7.23 percent.

Analysts say that the unexpected slowdown in the inflation index will trigger demands for interest cuts by the RBI, which has its mid-quarterly review meeting scheduled for end July. However, the current inflation is still above the RBI's comfortable zone for rate cuts and analysts also feel that the RBI may continue its tight stance as food inflation is stubborn at double digits.

The unexpected slowdown of inflation is fantastic news, despite the still elevated level: it opens the door for a rate cut already in July, and we expect a 25 bps move at the RBI meeting at the end of the month, Dariuz Kowalczyk, an economist with Credit Agricole CIB told Reuters.

I still maintain the view of no change in rates. The easing seen in inflation is a reflection of the slowdown in the economy which is hurting price pressures as also the easing of some domestic demand. The first quarter economic growth would be slightly softer than widely expected. Probably going forward the inflation could ease as the economy is slowing much faster than expected. We have not seen decent inflows into the market either and we could see some flattening in the back-end of the OIS curve, Reuters quoted Suresh Kumar Ramanathan, Head of Regional Rates and FX Strategy, CIMB, as saying.

The Indian markets reacted positively to the slowdown in inflation as BSE Sensex and NSE Nifty is trading with flat but with a positive bias at 17215.90 and 5232.10, respectively.