India's wholesale price index (WPI) rose an annual 9.06 per cent in May, driven by higher manufactured goods prices, government data showed on Tuesday.
The figure was above the median forecast for an 8.70 per cent rise in a Reuters poll and was higher than the annual rise of 8.66 per cent in April.
COMMENTARY:
Dariusz Kowalczyk, Senior Economist And Strategist at Credit Agricole CIB In Hong Kong:
"Indian WPI inflation unexpectedly rises to 9.1 per cent YoY. PM adviser says all monetary/fiscal policies should be used to curb inflation. It's now virtually guaranteed that there will be a rate hike on Thursday and there may be some speculation of another 50 bps move (although we still see 25 bps).
"INR and equities gave back some of early-day gains after the data, while INR OIS rates extended gains. The RBI continues to struggle to cap inflation and this may temporarily weigh on Indian assets, before price pressures stabilize later in H2."
Ramya Suryanarayanan, Economist At DBS Bank In Singapore:
"That was a pretty rapid price rise, especially for manufacturing WPI, used as a proxy for core inflation.
"As for the RBI meeting, the sharply higher-than-expected WPI does increase the odds of a 25 bps hike this week relative to before, but we still think the RBI may choose to adopt a 'wait-and-see' attitude at the policy meeting. The rationale being: we have seen a lot of rate hikes including the 50 bps hike in early May. These have to work through the system.
"Meanwhile, uncertainty on growth has also increased (weak vehicle sales and services PMI data for May) and weaker growth will also dampen pricing power and inflation ahead. Nonetheless, we continue to think the RBI will be back at hiking rates at the July policy meeting and expect repo rates to go up to 8 percent by December."
Nitesh Ranjan, Economist, Union Bank Of India, Mumbai:
"Numbers are higher than the consensus estimate but in line with RBI's medium-term projection. Core inflation is not showing any signs of cooling off and trend is somewhat divergent with weakness in investment demand.
"The price stability is central theme right now and thus we expect the RBI to hike repo rate by 25 bps on June 16 and another 25 bps in July. A lot more clarity on prices, investment and monsoon will be available by then."
Radhika Rao, Economist, Forecast PTE., Singapore:
"May WPI came in firmer than expected, even beating our above consensus estimates. Even as food and fuel indices moderated in the month as had been signalled by weekly trends, fears of second-round effects were confirmed as manufactured inflation has rebounded sharply.
"Awaiting the breakdown, likely rise in the core price indicator will cement expectations of 25 bps hike on Thursday, though early signs of easing in key growth indicators lowers the odds of a more aggressive hike. We expect the rate tightening cycle to be prolonged in view of pipeline risks."
Gaurav Kapur, Senior Economist, RBS, Mumbai:
"The headline WPI inflation has once again printed above 9 per cent. Even core inflation has risen to 7.3 per cent in May. And the March number has been revised upwards by about 1 percent. This suggests that inflationary pressures, especially in the non-food manufactured products group are still very strong despite significant monetary tightening and slowing growth.
"With an impending fuel price hike, headline inflation will remain well above 9 percent in June too. That said, PMI data suggests that output price inflation may have eased in June and that could temper the headline inflation somewhat.
"Overall, the inflation scenario is panning out as envisaged by the RBI and with inflation continuing to surprise on the higher side, the central bank will stay on course to tightening the monetary policy further. We expect a 25 bps hike on 16th of June."
Sonal Verma, Economist, Nomura, Mumbai:
"The big surprise is mainly because of the sharp increase in manufacturing prices which implies that core inflation is picking up. This cements the case for a 25 basis points rate hike on Thursday.
"The pace of upward revision has come down so this 9.06 may be revised to 9.50 per cent not more than that."
Anubhuti Sahay, Economist, Standard Charted Bank, Mumbai:
"The number is much higher than expected and a breach of 9 percent mark without a diesel price revision and in a month when global commodity prices were softer highlights the underlying inflationary pressure in the economy and validates the case for further tightening by the RBI. We expect a 25 basis points increase in repo rate on June 16."
Rupa Rege Nitsure, Chief Economist, Bank Of Baroda, Mumbai:
"This is along expected lines as we had seen spikes coming from food, mineral and fuel prices throughout May. Today's high print for inflation combined with recent signs of slowdown implies a modest 25 bps rate hike by RBI on Thursday rather than the aggressive tightening seen earlier."
Ashutosh Datar, Economist, IIFL, Mumbai:
"Upward revision in March inflation number is a big worry and the core inflation too has gone over 7 percent. Base case scenario for central bank action on Thursday remains at a 25 basis point hike, but now a 50 bps hike cannot be ruled out."
MARKET REACTION:
The benchmark 7.80 per cent 2021 bond yield immediately rose 3 basis points to 8.33 per cent after higher than expected inflation data.
The main share index trimmed gains to 0.25 percent from 0.4 per cent beforehand.
The 5-year overnight indexed swap rates rose 4 basis points to 7.80 per cent and 1-year was 6 basis points higher at 8.02 per cent after the data, dealers said.
BACKGROUND:
- The Reserve Bank of India has raised rates nine times since mid-March 2010 and economists expect it to raise rates by 25 basis points at its mid-quarter policy review on Thursday.
- India's economy expanded 8.5 per cent in the fiscal year ended March, and the central bank has forecast growth to moderate to about 8 per cent in the current fiscal year.
- The gross domestic product of Asia's third largest economy grew 7.8 percent in January-March, the slowest pace of growth in five quarters.
- Industrial output in April grew 6.3 per cent under a newly devised series, lower than 8.8 per cent in March, an indication that rising cost of credit and high inflation are slowing growth momentum in the economy.
- Infrastructure sector output grew 5.2 percent in April from a year earlier, slower than 7.4 percent in March. The sector accounts for 26.7 percent of industrial output.
- State-run refiners raised petrol prices by about 8.6 percent, or 5 rupees a litre last month, a record hike that has kept fuel inflation elevated in Asia's third-largest economy.
