take-away from WPI data

Surprise package from WPI data; expect 25 bps rate cut on or before 29^th January 2012

It is a story of having the cake and eat it too...December 2012 headline inflation print came at 7.18% (down from November 2012 print at 7.24%) against analysts estimate of 7.40-7.60%; another surprise was from downward revision in October 2012 print to 7.32% (from provisional 7.42%). The positive take-away is the sequential improvement since October 2012 despite bullish undertone in commodity market and weak Rupee. The concern for RBI will be on uptrend in retail CPI inflation into double-digit! While there is no case for 50 bps rate cut on 29^th January quarterly monetary policy review, it would be difficult for RBI to explain status-quo stance this time; best option would be to deliver 25 bps rate hike when the headline wholesale print is steadily progressing into the lower end of set tolerance zone of 7.0-7.5%; there is greater comfort now that it would indeed move below 7% by March 2013.

It would be great relief for Indian asset markets that the long over-due rate cut action is just round the corner. NIFTY should extend its gains above recent high of 6042 into 6100-6200 and Rupee should prepare for relief rally into 54.00-54.10 while 10Y Bond extends gains into lower end of 7.60-7.85% in anticipation of follow-on 25 bps rate cut in mid March policy  review.

It is not yet start of bullish trend. It is only bit of relief to shed weakness and get into consolidation mode till fresh cues emerge on macroeconomic dynamics. The concerns on twin-deficits are solid with no quick-fix solutions despite support to growth from rate reversal cycle. Can this trigger the investment cycle for capacity expansion and also add momentum to shift gears in domestic consumption? The sentiment (and confidence) has turned better and the system is seen to be in work-in-process for bullish revival!

Moses Harding