The rise in wholesale price index during June 2011 at 9.44% was below the expectations. As per Capital Market's poll of economist, the WPI inflation for June 2011 was expected to accelerate to 9.7%. The economists responding to the poll had projected the inflation in the range of 8.7% to 10.0% for June 2011. The median of the economists forecast's for inflation for June 2011 stood at 10.0%.

The inflation for primary articles increased to 12.2% in June from 11.3% in May 2011, while snapping moderation for last four sequential months by cumulative 714 bps. The increase in inflation for primary articles was mainly driven by sharp fall in inflation for minerals (from 11.9% to 27.0%). Meanwhile, the inflation for food articles was steady at 8.4% and that for non-food articles eased to 18.6% in June 2011 from 22.4% in May 2011.

The contribution of primary articles to the overall inflation increased to 309 bps in June 2011 from 282 bps in May 2011. The contribution of fuel product group rose from 189 bps to 196 bps in June 2011, while that of manufactured products also moved up to 442 bps in June 2011 from 434 bps in May 2011. The contribution of food item (food articles and food products) rose to 234 bps in June 2011 from 220 bps in May 2011, while that of non-food items (all commodities excluding food items) jumped to 718 bps in June 2011 to 682 bps in May 2011.

The Ministry of Commerce has continued to revise provisional inflation data upwards. The upward revision in April 2011 data (base 2004-05:100) was made with higher revised inflation for primary articles and manufactured products at 15.1% and 6.8% compared to 12.08% and 6.18% reported earlier. Meanwhile, the inflation for fuel and power group was revised downwards to 13.04% for April 2011 from 13.32% reported earlier. The overall inflation for April 2011 has been scaled up to 9.74% from 8.66% reported earlier.

Within the food articles group, the inflation for food grains, condiment & spices, fruits and vegetables eased to 1.6%, 10.3%, 26.4% and -7.5%, respectively during June 2011. However, the inflation for milk, ‘egg, meat & fish' and other food articles galloped to 12.5%, 9.6% and 17.9%, respectively. Among vegetables, inflation for ginger (-38.1%), brinjal (-17.3), okra (28.0%) and cabbage (29.2%) eased, while among fruits inflation for mango (24.6%), lemon (75.6%), apple (0.0%), banana (15.3%) eased during June 2011. The inflation for milk doubled to 12.5% in June 2011 from 6.4% in May and 4.7% in April 2011. The inflation for fish-marine and mutton increased to 11.5% and 5.5%, while that for poultry chicken eased to -5.0% in June 2011. Among, the spices, inflation for turmeric, cardamom and black pepper was negative at -34.4%, -16.1% and -19.3% during June 2011.

The inflation for non-food articles, in primary articles group, dipped to 18.6% in June 2011 from 22.4% in May 2011, driven by sharp fall in inflation for raw cotton from 68.4% in May 2011 to 51.3% in June 2011. However, the inflation for oilseeds, led by high inflation for groundnut, rape seed and soyabean, increased from 12.2% to 13.2% in June 2011. Further, inflation for raw rubber and timber eased to 31.9% and 17.2%, while that for flowers also eased to -10.6%.

The inflation for minerals group, under primary articles group, surged to 27.0% in June 2011 from 11.9% in May 2011. Within the minerals group, the inflation for crude petroleum spurted from 1.9% in April to 10.8% in May 2011 and zoomed to 47.3% in June 2011 exerting heavy pressure on inflation. However, inflation for iron ore declined from 19.3% to 13.3% in June 2011.

The inflation for fuel and power group rose slightly to 12.8% in June 2011 from 12.3% in May 2011. Within the group, the inflation for coal and electricity was steady at 13.3% and 1.3%, while that for mineral oils increased to 16.8% in June 2011. Among the mineral oils, the inflation for petrol, diesel and LPG increased to 30.6%, 6.6% and 12.2% during June 2011.

The inflation for manufactured product increased slightly from 7.3% in May 2011 to 7.4% in June 2011. Within Manufactured group, the inflation for food products increased to 14 months high of 8.5% in June 2011, led by rise in inflation for sugar (from 3.3% to 6.3%), milk powder (9.0% to 12.9%) and tea leaf (10.4% to 24.3%). Meanwhile, the inflation for ‘beverages and tobacco products' (11.7%) ‘basic metal products' (8.9%), ‘chemical and chemical products' (7.4%) and ‘non-metallic mineral products' (4.2%) also increased during June 2011. However, the inflation for ‘textiles' (14.7%), ‘transport equipments' (2.2%) and ‘rubber & plastic products' (7.8%) eased during June 2011.

During May 2011, WPI based inflation rate stood at 9.44%, of that 309 bps came from primary articles, followed by 442 bps from the manufactured products group and 196 bps from fuel products group. WPI based inflation for June 2011 was 38 bps higher at 9.44% compared to 9.06% reading in May 2011.

The contribution of fuel and power group increased from 189 bps in May 2011 to 196 bps during June 2011. Within the fuel products group, the contribution of mineral oils increased to 168 bps in June from 160 bps in May 2011, while that of coal and electricity was steady at 32 bps and -4 bps during June 2011. Within the mineral oils group, the contribution of LPG, petrol and diesel increased during June 2011.

The contribution of manufactured products to overall inflation increased from 434 bps in May 2011 to 442 bps in June 2011. Within manufactured products, the contribution of ‘food products' surged from 72 bps to 83 bps. However, the contribution of ‘chemical and chemical products', ‘basic metal alloys & metal products' and non-metallic mineral products groups moved up to 77 bps, 95 bps and 11 bps, respectively. Meanwhile, the contribution of ‘transport, equipment & parts' and ‘textiles' group eased to 10 bps and 89 bps during June 2011.

The contribution of foods item (food articles and food products) to overall inflation increased from 220 bps in May 2011 to 234 bps during June 2011. Meanwhile, the contribution of non-food (overall inflation excluding food inflation) inflation also advanced to 718 bps in June 2011 from 682 bps in May 2011. In percentage terms, the contribution of non-food items as well as food items to overall inflation was steady at 75.5% and 24.5%, respectively in June 2011.

However, the contribution of raw cotton dipped by 12 bps, while that of mango and motor vehicle fell by 09 bps each during June 2011. The contribution of cabbage, cotton and lemon fell 07 bps, 06 bps and 05 bps, while that of iron ore and apple fell by 04 bps each. The contribution of turmeric fell by 03 bps, while that of Kerosene, Litchi, Poultry Chicken, Logs & Timber, Rose, Naphtha, Polyester Chips, Polyester Yarn, Raw Rubber also fell 2 bps each during June 2011.

The official Wholesale Price Index for 'All Commodities' (Base: 2004-05=100) for the month of June 2011 rose by 0.9% from the previous months level. The annual rate of inflation, based on monthly WPI, stood at 9.44% (Provisional) for the month of June 2011 (over May 2010) as compared to 9.06% (Provisional) for the previous month and 10.25% during the corresponding month of the previous year.

Primary Articles (Weight 20.12%)

The index for Primary Articles group rose 2.8% during June 2011 from previous month's level. The index for 'Food Articles' group rose by 1.9% during June 2011 from the previous month level due to higher prices of tea (13%), jowar (10%), milk (6%), coffee, egg and fish-marine (5% each), gram (4%), pork, fish-inland and mutton (2% each) and maize and fruits & vegetables (1% each).  However, the prices of arhar (4%), bajra, masur, ragi, poultry chicken, barley and urad (3% each), condiments & spices (2%) and moong (1%) declined.

The index for 'Non-Food Articles' group declined by 1.7% due to lower prices of logs & timber (21%), gingelly seed (9%), raw cotton and raw jute (8% each), mesta (7%), raw silk (6%), castor seed, flowers and safflower (2% each) and sunflower and raw rubber (1% each). However, the prices of gaur seed (12%), rape & mustard seed and linseed (5% each), fodder (3%), groundnut seed (2%) and copra (1%) moved up.

The index for 'Minerals' group rose by 17.2% due to higher prices of crude petroleum (34%), magnesite (9%), steatite (7%), barytes and chromite (5% each), copper ore (3%) and iron ore (2%).  However, the prices of sillimanite (8%) and zinc concentrate (2%) declined.

Fuel & Power (Weight 14.91%)

The index for fuel and power group rose 0.7% due to higher prices of kerosene (5%), petrol and LPG (4% each), high speed diesel and bitumen (2% each).  However, the prices of light diesel oil (7%), aviation turbine fuel (5%), naphtha (4%) and furnace oil (3%) declined.

Manufactured Products (Weight 64.97%)

The index for manufactured products group rose by 0.1% during June 2011 from the previous month level. Within the manufactured products group, the index for 'Food Products' group rose by 0.6% due to higher prices of tea leaf (blended) (11%), mixed spices (7%), gur (6%), groundnut oil, powder milk, cotton seed oil and tea dust (blended) (3% each), tea leaf (unblended) and sunflower oil (2% each) and soyabean oil, ghee, copra oil, gola (cattle feed), mustard & rapeseed oil, vanaspati, gingelly oil, canned fish and tea dust (unblended) (1% each). However, the prices of rice bran oil (6%), sooji (rawa) (5%), palm oil and processed prawn (2 % each) and sugar and sugar confectionary (1% each) declined.

The index for ‘Beverages, Tobacco & Tobacco Products' group rose 3.5% in June 2011 from May 2011 level due to higher prices of dried tobacco (16%) and bidi (12%).

The index for 'Textiles' group declined 1.0% during June 2011 due to lower prices of cotton yarn (5%), man made fibre (2%) and gunny and hessian cloth (1%). However, the prices of jute yarn (5%), woollen textiles, man made fabric and cotton fabric (1% each) moved up.

The index for 'Wood & Wood Products' group rose 1.9% due to higher prices of plywood & fibre board (3%) and processed wood (1%).

The index for 'Paper & Paper Products' group rose 0.3% due to higher prices of maplitho paper (5%), cream laid woven paper (3%) and paper cartons / boxes (1%). However, the prices of newspaper (2%) and paper rolls (1%) declined.

The index for 'Leather & Leather Products' group rose by 0.6% due to higher prices of leather footwear (1%).

The index for 'Rubber & Plastic Products' group declined by 0.7% due to lower prices of plastic products (2%). However, the prices of tyres (1%) moved up.

The index for 'Chemicals & Chemical Products' group rose by 0.1% due to higher prices of rubber chemicals (4%), vitamins, adhesive & gum and lacquer & varnishes (3% each), turpentine oil and di ammonium phosphate (2% each) and hair / body oils, basic inorganic chemicals and washing soap (1% each). However, the prices of pesticides (2%) and synthetic resin, non-cyclic compound and explosives (1% each) declined.

The index for 'Non-Metallic Mineral Products' group declined by 0.1% due to lower prices of lime (2%) and slag cement (1%). However, the prices of white cement (1%) moved up.

The index for 'Basic Metals, Alloys & Metal Products' group rose by 0.6% due to higher prices of pencil ingots (4%), metal containers (3%) and sheets, melting scrap, gold & gold ornaments, rounds, steel castings, gp/gc sheets, steel structures, furniture and joist & beams (1% each). However, the prices of silver (7%), ferro silicon and sponge iron (3% each) and pipes/tubes/rods/strips (1 %) declined.

The index for 'Machinery & Machine Tools' group declined by 0.1% due to lower prices of machine tools (3%), fibre optic cable (2%) and t.v.sets, electric motors, batteries, insulators and electronic pcb /micro circuit (1% each). However, the prices of electric switch gears, magnets and hydraulic equipment (1% each) moved up.

The index for 'Transport, Equipment & Parts' group declined by 1.7% due to lower prices of motor vehicles (5%) and railway brake gear (4%). However, the prices of motor cycle / scooter / moped (1%) moved up.

Jay Shankar, Chief Economist, Religare Capital Markets

Headline WPI inflation rate (provisional) for June accelerated from 9.06% in May to 9.44% in June, mostly because of the hike in fuel prices and high manufactured products inflation. Revision of past months' numbers continue to be of greater concern now because of their quantum of increases (more than 100bps). April numbers have been revised up from 8.66% to 9.74%. With the core inflation averaging above 7% in 2011 – significantly above RBI's comfort zone of ~4% - demand momentum in the economy remains buoyant, largely due to a still-expansionary-fiscal-policy-stance, counterintuitive to the monetary tightening objectives. Thus, monetary policy makers are left to themselves in the fight against inflation. We believe that the RBI is at least 50bps away from pause, with a likely 25 bps hike on 26 July policy meet. Crude oil prices remaining stubbornly high above $110/bbl is the biggest risk to our domestic inflation and policy rate view.

Rohini Malkani, Economist, Citi Group

We maintain our view that prices will remain elevated due to: (1) upward revision to minimum support prices of agri crops which sets a floor to market prices (2) continued upward revisions to past data and (3) while commodity prices have eased, they are relatively higher than last year. We thus expect headline inflation to average 9%-9.5% with the March reading likely at 8% v/s the RBI's estimate of 6%.  With the WPI likely to remain elevated at 9%+ levels in the coming months and the RBI re-iterating that inflation is likely to get priority over growth, we maintain our view of the RBI hiking rates by a further 50 bps taking the repo rate to 8% by Dec11. Odds thus favor a 25 bps hike on July 26.

Amidst deceleration in India's IIP growth, the WPI based inflation continues to rise higher. Though there are signs of some product prices easing, the overall WPI based inflation continues to march northwards, which is a cause for concern. In this background, RBI may well discount the deceleration in IIP growth, and give weightage to unacceptably high and rising inflation, and may well increase repo rates further by 25 basis points in the ensuing meet on 26^th July 2011.