Consumer Price Index (CPI) inflation for the month of Dec-11 is likely to post a 10.6 per cent YoY rise. That translates into a 0.08 per cent MoM rise compared to 0.29 per cent MoM in Nov-11. ‘We earlier had projected that ongoing price pressure will rest upon non-food prices, while food price may slide going forward,’ said Saad Khan at AHL, adding that the decelerating Sensitive Price Index (SPI) inflation depicts the easing food price pressure. Whereas the rising trend witnessed in non-food and rigid growth in core (NFNE) prices averaging 0.8 per cent and 0.94 per cent MoM during 5MFY12 validates our contention, he added. He further said we also tended to note that December happens to be a peculiar month, in a sense, as compared to the rest of the months it experienced monthly deflation. Based on a 10 year average, the monthly inflation declined by -0.11 per cent, with July being the highest month registering on average 1.2 per cent MoM inflation.
In the recent Treasury Bill auction held on 28th of Dec-11, the cut-off yields of 3M and 12M tenure bills rose by 18bps (+11.83per cent) and 10bps (+11.90per cent) respectively. The rising yields in our view do not come as a surprise, given market anticipation of yields crossing the 12 per cent mark in the last auction. SBP duly rejected all the bids on all three tenures while in the follow-up of that auction result, we have seen secondary market yields trading above the 12 per cent benchmark rate.
The CPI inflation came in milder than expectations during the 5MFY12, registering an11.12per cent YoY rise on average, keeping the real interest rates in the positive territory. However despite this, the treasury yields have been pacing up. Historically we were of the view that treasury yields lag behind inflation, which when taken in the current context seems to be completely the opposite case. So far the current pattern seems that the treasuries are implicating a higher inflation going forward. ‘We do not think the treasuries are pricing in higher inflation expectation, at least in the given current mild inflationary environment. We think the current rising pattern in treasury yields are in fact based on the higher public sector borrowing requirement,’ he added. As long as public borrowing remains on the higher side there is always a tendency for yields to trend upwards, on account of liquidity constraints. So far the net domestic assets (NDA) have posted a growth of 7.1 per cent (16th Dec-11) FY12TD with schedule banks being the largest financier of this borrowing requirements.
Although SBP kept the discount rate at pause in the last monetary policy statement announced back in Nov-11, but excessive government borrowing requirements combined with further upside to inflation foreseen in months ahead, interest rate is likely to remain under pressure and treasuries are likely to sell at a record. Having said that we think policy rate is likely to stay on a hold throughout FY12, but considering the last monetary policy stance we sense that any adjustments in rate would come in line with the outlook on external accounts, he said, adding that we suspect deteriorating external accounts may warrant the rate re-tightening, sooner than initially envisaged.