India’s CPI inflation moderated to 5.48% YoY in Nov-24 from a 14-month high of 6.21% in Oct-24. The deceleration in the headline inflation print is in line with market consensus expectation of approximately 5.5%.

Key highlights of Nov-24 data

• On sequential basis, CPI fell by 0.15% MoM. This is lower than the series median sequential expansion of 0.42% in the headline index associated with the month of November. 
• Annualized food inflation moderated to a 3-month low of 8.20% in Nov-24 from 9.69% in Oct-24. This was on account of a favourable statistical base effect as well as a sequential easing of price pressures. 
  1. Sequentially, prices recorded a decline in case of Vegetables (-4.55% MoM), Fruits (-1.08% MoM), Meat and fish (-0.31% MoM), and Pulses (-0.23% MoM).
  2. There was however a partially offsetting impact from Oils and fats (3.06% MoM), Eggs (2.76% MoM), and Cereals (0.87% MoM). 
• Consolidated fuel inflation remained in negative territory for the fifteenth consecutive month, with the annualized print coming at -1.8% in Nov-24 vs. -1.7% in Oct-24. On a sequential basis, the index dropped by 0.11%. Sequential decline in price of PDS Kerosene, Charcoal, Dung Cake, Coal, and Electricity were partially offset by a sequential increase in price of Firewood and Non-PDS Kerosene. 
• Core CPI inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) remained steady at 3.7% YoY. Sequentially, the core index saw a tepid increase of 0.21% MoM.

Inference and Outlook

The moderation in food inflation in Nov-24 heralds the onset of favorable winter seasonality. Some of the food items that registered double digit decline in prices on sequential basis in Nov-24 were Tomato, Water chestnut, Cauliflower, Radish, Green chili, and Ginger.

Having said, concerns over stickiness in food inflation continue to linger. The FYTD average food inflation has so far clocked a run rate of 7.6%, higher than the 6.6% print seen during Apr-Nov FY24. In addition:

• While correction in tomato prices offers relief, other staple vegetables items like onion and potato are yet to see a downward adjustment in prices. Early trends from high frequency mandi prices indicate that while price correction in TOP (Tomato, Onion, and Potato) items has continued in Dec-24 so far, the intensity has moderated. For headline CPI inflation to make a comfortable retreat, it would require vegetable prices to post a faster pace of price correction.
• Meanwhile, price pressures in case of edible oils continue to linger. This not just reflects the impact of custom duty hikes announced by the central government in Sep-24, but it also captures the impact of higher international prices, which could be somewhat compounded by the recent weakness in rupee. 

The inflationary impact of currency depreciation (as per the RBI, a 5% weakness in the rupee adds about 35 bps of upside to headline inflation) is an active risk on the table and needs to be assessed in conjunction with the expected disruption to global trade under the likelihood of US president-elect Trump pressing tariffs on most of the countries in 2025.

Although the CPI basket has a much larger share of non-tradables compared to the WPI basket and is therefore less vulnerable to cost disruptions in international trade, the possibility of a lagged spillover impact cannot be ruled out. We believe, this is risk could potentially play out in FY26 and is unlikely to have any major impact on the FY25 inflation trajectory for India.

Meanwhile, we are hopeful that the arrival of kharif produce, healthy water reservoir levels along with a satisfactory progress of rabi sowing (which was up 1.5% YoY as of Dec 9, 2024) should help in dousing food price pressures in the coming months. As such, we maintain our FY25 CPI inflation forecast of 4.7% for now, while being cognizant of some upside risk.

From a monetary policy perspective, the near-term food-led hump in headline inflation continues to complicate policy decisions.  However, since monetary policy works with long lags, the policy focus should continue to remain beyond the immediate quarter. With downside risks to growth appearing more plausible than upside risks to inflation, we continue to expect the MPC to pivot in the upcoming policy review in Feb-25 with a 25-bps cut in the repo rate.

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research, “India's retail inflation appears to be stabilizing in the third quarter of the current fiscal with the Nov print at 5.48%, in line with our forecasts and offering some respite after the surge to 6.2% seen in October. The primary driver is a significant moderation in food prices (which nevertheless noted an 8.2% increase), particularly vegetables. After recording a staggering 42% YoY increase in October, vegetable price inflation is estimated to have declined to ~30% in November, with tomato prices leading this downward trend. Additionally, fuel prices continue to be in a contractionary mode, easing pressures on both househol

d budgets and operating costs for businesses. We expect further relief in food inflation with the arrival of the Kharif crop in late November to December.

Core CPI inflation at 3.9% in Nov-24 has largely remained stable, supporting the stabilization of the headline inflation. This comes as good news for the new RBI Governor, who may have to shift focus towards economic growth which has shown signs of a slowdown in Q2FY25. If the headline print continues its downward trend towards 4.5% in the next 3 months, it could offer the central bank greater confidence to deliver its first rate cut in Feb 2025.”

Table1: Overview of key sub-components of inflation 

Note:

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI

Chart 1: Notwithstanding the price correction vis-à-vis its recent peak, staple vegetable prices continue to overshoot the historical trend

Chart 2: Surge in edible oil inflation reflects the combined impact of duty hikes as well as hardening of international price pressures