The inflation figure for June 2012 was driven down by fall in inflation for milk, gaur seed, high speed diesel, copper ore, fish marine, motor vehicle, furnace oil, crude petroleum etc. Meanwhile, the inflation for mango, cotton yarn, raw cotton, iron ore, rice, brinjal, petrol, sugar, poultry chicken, lemon etc increased during June 2012.

The inflation for primary articles eased slightly to 10.46% in June from 10.88% in May 2012. The inflation for fuel and power group has consistently moderated from three years high of 17.0% in January 2012 to 12.8% in March 2012, 11.53% in May 2012 and further down to nearly two and half years low of 10.3% in June 2012. Meanwhile, the inflation for manufactured products continued to remain steady for the four sequential months at 5.0% in June 2012.

The inflation for food item (food articles and food products) was steady at 9.03% in June 2012 compared to 9.02% in May 2012 which has jumped from mere 1.5% in January 2012. Meanwhile, the inflation for non-food items (all commodities excluding food items) eased from 7.01% in May 2012 to 6.59% in June 2012. The core inflation (manufactured products excluding foods products) rose slightly from 4.86% in May 2012 to 4.89% in June 2012, which remains nearly steady for fourth sequential months.

The contribution of primary articles to the overall inflation rose to 37.2% (at 269 bps to 7.25% inflation) in June 2012 from 37.1% (at 280 bps of 7.55%) in May 2012. The contribution of fuel product group dipped to 22.3% (162 bps) in June 2012, while that of manufactured products rose to 40.5% (293 bps) in June 2012. The contribution of food item (food articles and food products) increased to 34.1% (247 bps) in June 2012 from 32.5% (246 bps) in May 2012, while that of non-food items (all commodities excluding food items) eased to 66.1% (479 bps) in June 2012 from 67.5% (510 bps) in May 2012.

The Ministry of Commerce has sharply scaled up the provisional inflation figure for April 2012 to 7.50% from 7.23% reported earlier. The inflation figure of fuel and power group for April 2011 was scaled up to 12.10%, while that for manufactured products was raised to 5.27% from 11.03% and 5.12% reported earlier. However, the inflation for primary article was revised downwards to 9.55% from provisional figure of 9.71% reported earlier.

Coal prices based on the fully variable Gross Calorific Value push up inflation

Government has revised the WPI indices for coal prices based the fully variable Gross calorific Value based system of classification. This has pushed up the inflation for coal sharply up to 28.8% for January 2012 and 24.2% for February 2012. Accordingly, the overall inflation was also revised upward. The inflation for January 2012 was revised upward by 34 bps to 7.23% and for February 2012 was raised by 20 bps to 7.56%. The revision in the indices for January and February 2012 has been made to final figures revised earlier.

Inflation remain steady in April-June 2012

The WPI based inflation has remained nearly steady at 7.4% during April-June 2012(Q1FY2013) compared to 7.5% in the previous quarter (January-March 2012). The inflation for primary articles moved in to double digits at 10.3% after two quarters of single digit run, as food inflation doubled to 10.8% in Q1FY2013 from 5.0% in Q4FY2012.Within the primary articles, the inflation non-food articles also rebounded to 5.5% in Q1FY2013 from sub-zero level of (-) 0.9% in Q4FY2012. However, the inflation for minerals halved to 15.3% in Q1FY2013.

The inflation for fuel and power group eased to 11.3% in Q1FY2013 from 14.9% in Q4FY2012, but continued to run in double digit for tenth sequential quarter. The decline in fuel and power group inflation was facilitated by moderation in inflation for coal and mineral items, while the inflation for electricity was steady.

The inflation for manufactured products also eased to ten quarters low of 5.1% in Q1FY2013 from 5.9% in Q4FY2014. The textiles, chemical products and base metal group contributed to decline inflation of manufactured group during Q1FY2013 from Q4FY2012.

Inflation for Sub-Groups

The decline in the inflation for primary articles was mainly driven by non-food articles inflation easing from 8.47% in May 2012 to 6.85% in June 2012, while inflation for mineral also declined to 14.5% in June 2012 from 15.6% in May 2012. However, the inflation for food articles rose slightly to 10.81% in June 2012 from 10.74% in May 2012.

Within food articles group, under primary articles group, the inflation for vegetables eased slightly to 48.8% in June from 49.4% in May 2012, but that for fruits increased to (-) 3.6% in June 2012. The inflation for food grains further increased to 9.27%, while that for tea increased to 29% from 26.5% in May 2012. On other hand, the inflation for milk dipped to 7.3%, while that for fish-marine, fish-inland and mutton declined to 38.2%, 8.1% and 9.1% in June 2012. The inflation for condiment and spices increased to (-) 19.4% in June 2012 from (-) 19.8% in May 2012. Within the vegetables, the inflation for brinjal and potato increased to 46.0% and 75.9%, while that for cabbage and onion declined to 183.5% and (-) 9.4% in June 2012. Among the food grains, the inflation for rice, bajra and gram increased to 7.5%, 10.7% and 59.5%, while that for jowar declined to (-) 8.4% during June 2012. Among the fruits, inflation for mango, lemon, banana and litchi surged, while that for orange, papaya and apple declined.

The inflation for non-food articles, in primary articles group, dipped to 6.8% in June 2012 from 8.5% in May 2012, driven down by dip in inflation for guar seed from 548% in May 2012 to 323% in June 2012. The inflation for oilseeds also declined to 18.5%, as the inflation for rapeseed and groundnut seed declined to 28.3% and 21.6% during June 2012. Further, the inflation for flowers declined to (-) 13.1% and raw rubber also declined (-) 15.5% in June 2012. However, the inflation for raw cotton increased to (-) 15.6% in June 2012 from (-) 19.4% in May 2012.

The inflation for minerals group, under primary articles group, eased to 14.5% in June 2012 driven down by sharp dip in inflation for copper ore to 18.8% in June 2012, while the inflation for crude petroleum also declined to 17.8% in June 2012. Within the minerals group, the inflation for iron ore surged 9.4% in June 2012 from to 3.0% in May 2012.

The inflation for fuel and power group declined to 10.27% in June 2012. Within the group, the inflation for coal and electricity was steady at 13.9% and 4.0%. Meanwhile, the inflation for mineral oil declined to 10.9% in June 2012. Among the mineral oils, the inflation for high speed diesel, furnace oil, kerosene and LPG declined to 6.8%, 23.6%, 13.1% and 11.3% during June 2012.

Within Manufactured group, the inflation for food products declined to 5.78% in June 2012, while that for beverage % tobacco and wood products also eased to 5.7% and 3.8% in June 2012. Further, the inflation for basic metals and transport equipment also fell to 9.83% and 3.23% in June 2012. However, the inflation for textiles increased to (-) 1.6% led by increase in inflation for cotton textiles (from -8.6% to -5.8%), man made textiles (-0.7% to 0.7%), while that for rubber & plastic products and chemical products rose to 2.2% and 6.9% in June 2012. Meanwhile, the inflation for machinery and machine tools also moved up to 2.4% in June 2012

During June 2012, WPI based inflation rate stood at 7.25%, of that 37.2% came from primary articles, followed by 40.5% from the manufactured products group and 22.3% from fuel products group. WPI based inflation for June 2012 was 30 bps lower compared to 7.55% reading in May 2012.

Within the primary articles, the contribution of food articles to overall inflation rose to 191 bps in June 2012 from 188 bps during May 2012. Within the food articles, the contribution of fruits, cereals, pulses and vegetables increased, while that of milk, fish marine, fish0inland and mutton declined during June 2012. The contribution of non-food articles dipped to 34 bps in June 2012 from 43 bps in May 2012. Among the non-food articles, the contribution of gaur seed, oilseeds and flowers fell, while that of raw cotton increased during June 2012. The contribution of mineral group increased declined to 44 bps in June 2012 from 48 bps in May 2012, due to slump in inflation for copper ore and crude petroleum during June 2012.

The contribution of fuel and power group stood at 162 bps during June 2012. Within the fuel products group, the contribution of mineral oils fell from 136 bps in May 2012 to 116 bps in June 2012. Meanwhile, the contribution of coal and electricity was steady at 35 bps 10 bps during May 2012. Within the mineral oils group, the contribution of high speed diesel, furnace oil, kerosene, LPG and ATF eased during June 2012.

The contribution of manufactured products to overall inflation was nearly steady at 293 bps June 2012 from 294 bps in May 2012. Within manufactured products, the contribution of ‘food products' eased 02 basis points, while that of base metals and transport equipment also declined 05 bps each. The contribution of beverages and tobacco products declined 04 bps, while that of ‘textiles' increased 13 bps. The contribution of machinery & machine tools and chemical and chemical products also moved up 02 bps and 01 bps in June 2012.

As per the commodity wise look-up, the contribution of mango increased 07 bps, while that of cotton yarn also rose 07 bps during June 2012 from May 2012 level. Further, the share of raw cotton rose 06 bps, while that of iron moved up 06 bps in June 2012. The contribution of rice, brinjal, petrol, Non-Cyclic Compound and sugar increased 04 bps each, while that of poultry chicken, Lemon, Potato, Gram, Turmeric rose 02 bps each during June 2012.

The contribution of milk and guar seed dipped by 16 bps and 12 bps, while that of high speed diesel and copper ore dipped by 11 bps and 08 bps, respectively during June 2012 from May 2012 level. The contribution of fish-marine, motor vehicle and furnace oil decline 04 bps each, while that of LPG, crude petroleum and Petrochemical Building Blocks declined 03 bps each. Further, the contribution of Rape & Mustard Seed, Plywood Board, Orange, Wheat Flour (Atta), Jowar etc declined 02 bps each in June 2012.

Out of the 676 commodities, about 278 commodities, which carry 47.32% weight in the WPI, has recorded deceleration in inflation rate during June 2012 compared with May 2012 inflation rate. About 264 commodities that hold 39.72% weight in the WPI have witnessed acceleration in inflation rate during June 2012. However, the inflation for 134 commodities, carrying 12.96% weight in WPI, has remained unchanged during June 2012.

Primary Articles (Weight 20.12%)

The index for primary articles group rose 0.2% during June 2012 from May 2012 level. Within the group, the index for `Food Articles` group increased 1.4% due to higher prices of poultry chicken (7%), gram (6%), masur (4%), fruits & vegetables, egg, arhar, rice and pork (2% each) and tea, milk, wheat and mutton (1% each). However, the prices of barley (6%), jowar, condiments & spices and ragi (2% each) and moong and bajra (1% each) declined.

The index for 'Non-Food Articles' group declined by 2.6% due to lower prices of gaur seed (28%), logs & timber (9%), gingelly seed (4%), raw rubber (3%), raw cotton (2%) and linseed, flowers and groundnut seed (1% each). However, the prices of raw jute (5%), niger seed and raw silk (4% each), soyabean (3%), sunflower (2%) and mesta, safflower, coir fibre and castor seed (1% each) moved up.

The index for 'Minerals' group declined 2.6% due to lower prices of copper ore (16%), barytes (3%), crude petroleum (2%) during June 2012. However, the prices of magnesite (5%), manganese ore (4%), zinc concentrate (2%) and iron ore (1%) moved up.

Fuel & Power (Weight 14.91%)

The index for this major group declined by 0.4% due to lower prices of light diesel oil (7%), aviation turbine fuel and furnace oil (6% each) and naphtha (4%). However, the prices of petrol (7%) moved up.

Manufactured Products (Weight 64.97%)

The index for manufactured products group increased 0.3% during June 2012 from the previous month level. Within the manufactured products group, the index for ‘Food Products' group rose by 0.2% due to higher prices of gur, tea dust (blended) and cotton seed oil (6% each), tea leaf (unblended) and processed prawn (3% each), gola (cattle feed) (2%) and palm oil, khandsari, oil cakes, rice bran oil, tea dust (unblended) and sunflower oil (1% each). However, the prices of wheat flour (atta) and sooji (rawa) (3% each), tea leaf (blended) and gingelly oil (2% each) and soyabean oil, groundnut oil, mixed spices and bakery products (1 % each) declined.

The index for 'Beverages, Tobacco & Tobacco Products' group rose 0.7% due to higher prices of dried tobacco (3%), bidi (2%) and chewing tobacco (scented or not) (1%).

The index for 'Textiles' group rose 0.7% due to higher prices of jute yarn (3%) and man made fabric, jute sacking bag, man made fibre and cotton yarn (1% each). However, the prices of gunny and hessian cloth (1%) declined.

The index for 'Paper & Paper Products' group rose 0.2% due to higher prices of newsprint (2%). However, the prices of computer stationery (1%) declined.

The index for 'Leather & Leather Products' group rose 0.4% due to higher prices of leather footwear (1%).

The index for 'Rubber & Plastic Products' group rose 0.3% due to higher prices of plastic/pvc pipes (3%) and polyester film (2%).

The index for 'Chemicals & Chemical Products' group rose 0.4% due to higher prices of explosives (6%), non-cyclic compound and basic inorganic chemicals (2% each) and di ammonium phosphate, dye & dye intermediates, ammonium sulphate, safety matches/ match box, ayurvedic medicines, distemper, photographic goods, hair / body oils and pesticides (1% each). However, the prices of turpentine oil, basic organic chemicals, polymers and antacid and digestive preparations (1 % each) declined.

The index for 'Non-Metallic Mineral Products' group declined 0.2% due to lower prices of railway sleeper, white cement and grey cement (1%). However, the prices of glass bottles & bottle ware and asbestos corrugated sheet (2% each) and bricks & tiles and slag cement (1% each) moved up.

The index for 'Basic Metals, Alloys & Metal Products' group rose 0.4% due to higher prices of steel: pipes & tubes (3%), gold & gold ornaments, brass, rails and furniture (2% each) and pencil ingots, slab, pipes/tubes/rods/strips, ferro manganese and aluminium (1% each). However, the prices of melting scrap (2%) and angles, copper wire (all types), gp/gc sheets, wire rods and silver (1% each) declined.

The index for 'Machinery & Machine Tools' group rose 0.3% due to higher prices of electronic pcb /micro circuit (4%), insulators and microwave oven (3% each), electric motors, electric switch gears and air conditioner & refrigerators (2% each) and boiler & accessories, machine tools, lamps, electrical pumps and electric generators (1% each). However, the prices of thresher (5%), textile machinery (3%) and fluorescent tubes, electric switches and ball/roller bearing (1% each) declined.

The index for 'Transport, Equipment & Parts' group rose 0.6% due to higher prices of motor vehicles, parts of ships/boats etc. and auto parts (1% each). However, the prices of tractors (1%) declined.

Expert Views

Sonal Varma, India Economist, Nomura Financial Advisory Services

Inflation momentum moderated this month, but it is important to identify whether this moderation is sustainable. The weak momentum in June headline inflation was essentially from input costs such as cotton and oilseeds, which have rebounded in July. Oil prices are back above USD100/bbl, while domestic fuel price hikes are still pending. Food inflation is likely to accelerate in the coming months due to a weak monsoon season and a rise in global prices of corn, oilseeds and edible oils. The hike in state electricity prices has yet to be reflected in the WPI data. In fact, on a month-on-month basis, the momentum in core inflation accelerated in June to 0.5%, seasonally adjusted (sa), compared to an average of 0.4% over the last 12 months and 0.2% over the last 6 months. Core inflation has remained sticky at around 5% y-o-y over the last four months despite positive base effects and weak demand, highlighting the rise in underlying momentum from a weak INR and supply-side bottlenecks.

So, can the Reserve Bank of India (RBI) cut policy rates on 31 July? Based on the RBI's own concerns over rising food inflation, elevated retail inflation and a lack of fiscal response from the government, nothing has materially changed to shift the RBI's stance. June WPI inflation was lower than expected, but was still above 7% and one data point does not make a trend. Given the upside risks to inflation from the recent rebound in global commodity prices and a weak monsoon season, we expect all policy rates to remain unchanged on 31 July. Eventually, rates have to come down. But for this scenario to play out, India's inflation has to sustainably decline at or below 6.5%. For now, we expect the RBI to use the Oct-Mar window (of lower headline inflation) to lower the repo rate by 50bp to 7.50%.

Aditi Nayar, Economist, ICRA

Initial estimates place headline WPI at 7.25% in June 2012, appreciably lower than our estimate (7.7%). In 2012, minimum support prices were increased substantially for various oilseeds and pulses, items for which imports are required to fill the domestic demand-supply gap. However, sowing of such items currently remains below trend on account of the sub-par coverage and magnitude of the monsoon rainfall, which may result in a further rise in prices. Overall, a hardening of inflationary expectations on the back of double-digit food inflation for the last four months remains a concern. Sluggish industrial activity has led to some weakening in the pricing power of producers and core inflation has remained steady at around 5% in recent months despite a weaker Rupee. However, concerns persist on account of the recent rise in the price of the Indian crude oil basket and the weaker-than-normal progress of the monsoon. Accordingly, we expect that the RBI may retain the policy rate in the upcoming policy review.

While today's numbers provide some relief at face value, we have to read beyond the headline and look ahead to get a better sense of the inflation story. Doing that, as it turns out, there is not that much relief to be found. Food inflation is still ticking up and with monsoons having so far delivered below-normal rains there are upside risks to food inflation. We are only still mid-way through the summer monsoon, so there is a chance that heavier rains in the second half can eradicate the deficiency. But, there is obviously no guarantee that this will happen.

While the steady reading for core inflation is encouraging, it could begin to rise again as higher food and energy prices spill over to broader inflation pressures. The recent PMI sub-readings for input and output prices suggest that cost pressures and pricing power remain in place. It is also worth keeping in mind that there is little if any slack in the economy as potential output has declined on the back of slow progress on supply-side reforms. This will keep core inflation pressures simmering as supply struggles to keep pace with demand despite the slowdown in growth.

Moreover, diesel and kerosene prices have yet to be adjusted upwards, which could happen sooner rather than later. There are also upside pressures on inflation from the still depreciated exchange rate. The implication of all of this, in on our view, is that the RBI will remain cautious about cutting rates, especially in the absence of decisive steps from the government on fiscal consolidation and structural reforms. Headline inflation eased more than expected in June, but core inflation held steady. Given lingering upside risks to inflation, the RBI is not likely to be eager to cut.

Indranil Pan, Chief Economist, Kotak Mahindra Bank

Today's inflation outturn has already opened up some hopes from market participants for a monetary easing by the RBI at its July 31 policy meeting. This is indicated by the G-Sec market where the yield on the benchmark 10-year paper (8.15%GS2022) has come off to 8.01% intraday from 8.10% opening levels. However, we are not as sure if the RBI will immediately oblige the market with a monetary easing as conditions on the ground have changed very little from its previous monetary policy statement. Further, in a recent statement Dr Subbarao had indicated his continuous worry with inflation expectations becoming 'unhinged‘ if adequate care is not taken. The core inflation has seen a slight uptick in momentum with mom change in June at 0.4% compared to 0.2% in May. The situation on inflation could become even more problematic with failing monsoons as CPI inflation would also fail to moderate. Thus, we continue to stay with our call for a pause on July 31 on account of (1) sticky core inflation, (2) lack of fiscal correction, (3) inflation risks due to a weak monsoon and (4) continued haze on the global scenario.

Richard Iley, Chief Asia Economist, BNP Paribas

June's WPI was a little softer than expected but these are far from game changing data. Non-food primary articles (especially gaur seeds!) and diesel prices were the key components pulling WPI inflation down in June. Core inflation gauges were steady. The ‘All-India' CPI data out later this week will be as important, if not more so, in determining whether the RBI's policy space is, in fact, expanding. We doubt it. The poor start to this year's monsoon, a still fragile INR, uncomfortably elevated household inflation expectations and continued policy inertia in New Delhi leave the central bank relatively boxed in.

Sujan Hajra, Chief Economist, Anand Rathi Financial Services

The marginal softening in WPI in Jun '12 does not provide any comfort. Double-digit inflation in primary articles (a 20% weight in the WPI) would continue to put upward pressure on overall WPI inflation. The poor monsoon so far is likely to push up food prices, particularly pulses, oilseeds and vegetables. We expect food inflation to inch towards 15% in the next six months. Besides, the electricity-index revisions due to tariff hikes in many states and the much-needed diesel price hike, when applied, are likely to push WPI inflation up. We maintain that WPI inflation is likely to be around 8% in FY13.

Despite considerable growth deterioration in the last few months and mild softening in WPI inflation in Jun '12, the RBI is likely to focus on stubborn and worrisome inflation. Certain key central banks (the euro area, China and South Korea) have recently cut policy rates to bolster their economies. India, however, is unlikely to follow suit as, unlike in those countries, inflation in India continues to soften. Moreover, the deficient monsoon in FY13 would make it more difficult for the RBI to consider monetary easing in the next six months. Rather, we expect the RBI to focus on liquidity-easing measures in FY13 through open-market operations (`2trn) and by slashing the CRR (by up to 150bps) in FY13.

Outlook

India's WPI based inflation eased from 10.0% in September 2011 gradually to 7.2% in January 2012. But since then it went up to 7.7% in March 2012 and remained sticky at 7.5% in April-May 2012. Finally, it has eased to 7.3% in June 2012, which was well below market expectations.

With IIP growth remaining sluggish, and WPI based inflation started easing, there is some headroom for RBI to cut rates. But the key risks are the crude oil prices on the global front and poor South West Monsoon seasonal rainfall sofar.