September WPI At Ten Month High, July Numbers Revised Upwards

The September WPI inflation rose by 7.81% which is in line with the market expectations. September numbers however are at the 10-month high level indicating an unusual situation of high and persistent inflation with slowdown in the country. The September inflation numbers are slightly higher than the August numbers which were 7.55%. The July 2012 numbers have been revised higher from 6.87% to 7.52%. The market however was expecting the WPI inflation numbers to come higher to about 7.8%. With this the rate cut hopes has again spiked and this time is it’s more with a negative bias.

Earlier on Friday the CPI data showed that the September inflation fell to 9.73% which was driven by marginal fall in the fuel and food prices.

There had been speculations that the RBI may partially cut the key policy rate in this year itself, but except for one instance, RBI has kept the ‘status quo’ on the interest rates. To address the liquidity woes though, it has cut the SLR and CRR in the fiscal. RBI in the last month said that the liquidity concerns have been addressed by the SLR cut and quantitative easing in the USA. It has however made it clear that the domestic inflation remains at unbearable high level which is detrimental to the economy. A further rate cut may fuel growth in short term but in long term it is very harmful to the economy.

The annual inflation projections of many agencies and institutions for 2012 have grown to above 8% fuelled by recent fuel hike by the government. Many central banks globally have also gone for bond purchase programs or have boosted the liquidity which will increase the commodity prices worldwide. This will be very negative for the India as the inflation will further rise. In that case the RBI may keep the interest rates at the current level for few more months. One should also not be surprised to see if RBI further hikes the rates.

On the bourses, this month has been seeing negative trades as the focus has moved from the reforms to the corporate earnings. The markets are showing corrections as they are catching up the fundamentals. Globally too, the same has remained a trend as major indices are showing corrections. We expect the market to take the cues from the corporate earnings than the RBI’s next move as the ‘Status Quo’ seems to be discounted by the market.