India July wholesale prices likely to tick higher following gradual uptrend in manufacturing sector

India’s wholesale prices are expected to have edged higher during the month of August, following a gradual uptrend in the manufacturing index; also base effects are likely to offset the downdraft in food prices. Further, we foresee that the country’s wholesale price index (WPI) could outpace retail inflation over the coming few months, before averaging out with the latter.

WPI in India is expected to beat the 4.0 percent mark, starkly above the 3.6 percent attained in July, despite a softer consumer price index-led inflation figure, released Monday. While an easing of consumer prices raised hopes of an interest rate cut by the newly-appointed Governor of the Reserve Bank of India (RBI), Urjit Patel in his debut monetary policy meeting next month, speculations of a rise in wholesale prices might offset such an expectation.

Separately, India’s southwest monsoon lost momentum last month and early September. Cumulative rainfall since June 2016 stood at 4 percent deficit to the long-term average (LPA). The shortfall is most acute in the south and eastern parts of the economy, while rest of the country experienced slightly above average rains.

Further, the Indian Meteorological Department has estimated this year’s southwest monsoon to reach 106 percent of the LPA, which implies that September needs circa 9-10 percent surplus rain to meet this year’s target. Season-to-date progress, however, points to a modestly below normal rainfall this year, with Sep seasonally marking a month of retreat.

Moreover, sowing activity has also gained traction, with the total area sown up 4 percent from the same period a year ago, led by a sharp increase in pulses by 36 percent y/y, rice 14 percent, cereals and oilseeds. This marks a pick-up from a 23 percent decline in total area sown by late-June.

"This softening trend leaves the door open for a rate cut in 4Q16, with odds of a move in Oct16 on the rise ," DBS commented in its latest research report.

Meanwhile, the benchmark Sensex fell 0.06 percent or 17.96 points to 28,335.58 and Nifty-50 futures traded 0.23 percent lower or 19.75 points at 8,728.25 by 4:50 GMT