The WPI Inflation for Feb’2011 accelerated to 8.31% in Feb’2011 despite relatively lower food inflation. The rise in the headline inflation can be attributed to rise in the ‘Manufactured Product’ Index that increased ~5% in Feb’2011 as against 3.75% in the preceding month. Inflation number is significantly higher than the market expectations of ~7.8%. The build-up inflation for the period April-Feb’2010-11 at 7.51%, is above the RBI’s target of 7% for the current fiscal. Hence we expect another hike in key policy rates in the forthcoming Mid-quarter review of the monetary policy by 25 bps each.

Food Inflation dropped to 10.65% YoY in Feb’2011 from 15.65% in Jan’2011. The decline in the food inflation is largely due to decrease in items like potatoes (-11.28%), pulses (-5%) and wheat (-1.67%). We expect the food prices to rise again in the next month ahead of the festive demand. Demand- Supply mismatches in items such as milk and eggs can also re-ignite the food inflation.

The fuel Index rose marginally to 11.49% YoY in Feb’2011, from 11.41% in the previous month. The Increase in ‘Liquefied Petroleum Gas’, ‘Petrol’ and ‘High Speed Diesel’ came in at 14.99%, 28.73% and 12.45% resp. for the month of February.

‘Manufactured Products index’ witnessed a rise of ~5% YoY as compared to 3.75% in the previous month. The highest contributors to the rise in this index are the groups ‘Basic Metals Alloys & Metal products’ and ‘Chemical and Chemical products contributing ~29% and ~19% respectively.

The Rise in ‘Basic Metals, Alloys and Metal Products can be attributed to higher prices of Silver (11% M-o-M), brass, ferro, manganese and wire rods (9% M-o-M) and welding rods and ferro silicon (7% each). The rise in the group ‘Chemicals and Chemical Products’ is due to higher prices of Zirconion Silicate (14% MoM) carbon Di sulphide and synthetic rubber (13% MoM).

Outlook: The WPI inflation continues to be a cause of worry for the policy makers and may rise further in March ahead of the festive season. The rising crude and commodity prices may further add to the inflationary pressures. We expect the RBI which has been constantly trying to tackle this inflation, to raise its key policy rates by 25 basis points in the forthcoming mid quarter review of the monetary policy on 17th of this month.