India’s WPI inflation eased to 6.9% y-o-y in March from 7.0% in February (Consensus: 6.7%; Nomura: 6.8%, Figure 1), in line with the RBI’s projection of 7% by March (the final number could be slightly higher). January WPI was revised to 6.89% y-o-y from 6.55%.

Input cost pressures are picking up. Primary article inflation accelerated due to higher food prices and a pickup in global commodity prices in January/February, which led to higher prices of oilseeds, rubber and minerals. Food inflation (primary + manufactured) surged to 8.5% y-o-y in March from 5.9% in February from higher price momentum in cereal, fruits and vegetables and as positive base effects from last year fade. However, the highlight of the release was the drop in core inflation (WPI manufactured ex-food) to 4.7% in March from 5.7% in February. This is partly due to base effects, but the sequential seasonally adjusted m-o-m rise in core inflation, at 0.2% in March, is below the 2011 average of 0.6%. Clearly, pricing power has fallen due to the slowing growth reflected in a lower pass-through of input into output prices. Given weak growth, we expect this trend of lower pass-through to continue.

The March reading supports our 2012 inflation expectations: headline inflation should remain within the 6.5-7.5% range, with falling core but higher food inflation (see India: Four cyclical tailwinds to watch, 11 April 2012).

Food inflation should remain elevated, largely from the continued demand-supply gap. In contrast, core inflation should continue to ease from lower non-oil commodity prices and the lagged effect of a negative output gap (Figure 2). Note that we expect a pickup in core inflation in April because of a base effect; however, the trajectory thereafter is lower. At its policy meeting tomorrow, we expect the RBI to cut the repo rate by 25bp and keep the cash reserve ratio unchanged. However, a rising current account deficit, suppressed inflation and the structural nature of the fiscal deficit suggest that it will be a shallow rate cutting cycle. In all, we expect a total of 75bp of repo rate cuts in 2012.

Nomura India

Inflation remains stubborn at 6.9% for third consecutive month: CRISIL