The Inflation deamon

The WPI for the month of December stood at 7.31% against 6.15% in the corresponding month of the last year.The same figure posted 4.78% in the previous month. The released figure is almost in the line with the market’s expected figure

• This high figure of inflation is the resultant of high food prices and a low base effect. Government has thus, decided for the off taking of surplus stocks of wheat and rice and also efforts to be made to increase the farm-productivity
• The inflation figure is much higher than the RBI’s forecast of around 7% by March end which the central bank published in its second quarter monetary policy review Hence it will definitely going to pull a chord with the RBI and help it to determine the interest-rate and monetary policy. It is expected to tighten the monetary policy and thus, hike the interest-rates as high inflation erodes the value of money and thus decrease its purchasing-power.

Thus we believe that that one should start booking profits form the rate sensitive like banking and real estate and move towards defensives like FMCG and Pharma.

Inflation Internals

• The sub-group of primary articles rose by 14.88% y-o-y against 11.15% in Dec’08.It registered a growth of 1.25% m-o-m mainly because of high growth in the food articles, which increased by 0.45% m-o-m. The increase in the food articles was induced by the surge in prices of urad, moong, spices, condiments, vegetables, pulses and wheat
• In the same sub-group, the non-food articles increased by 3.92% m-o-m due to higher prices of raw tobacco, oil-seeds and fibers like raw jute & rubber. The index for minerals rose to 0.19% m-o-m which was due to higher prices of fire-clay, dolomite, phosporites barites and many other minerals
• The second sub-group of fuel, power, lights and lubricants increased to 4.29% y-o-y from -0.21 in Dec’08. It registered a growth of a mild 0.09% m-o-m due to higher prices of light diesel oil, furnance and neptha oil
• The third sub-group of manufactured products registered an increase of 5.17% y-o-y from 6.63% in Dec’08. it registered a growth of 0.19% m-o-m mainly because of increase in the prices of food-products, sugar, edible oils, cotton textiles and rubber and plastic products Food products rose by 0.76% m-o-m on note of higher prices of edible food products.
• Sugar rose by 0.20% while there was an increase of 2.27% in edible oils due to higher prices of oil-seeds.