Overview

India’s CPI and WPI inflation moderated in Apr-23 to an 18-month low and a 34-month low of 4.70%YoY and -0.92%YoY respectively.

 More importantly:

• Headline CPI and WPI inflation eased by 96 bps and 226 bps respectively over the previous month.
• Notwithstanding the co-movement at headline level, both inflation metrics diverged sequentially in Apr-23 with CPI rising to 0.51% MoM and WPI remaining unchanged (0.00% MoM) for the second consecutive month.
• Headline CPI inflation in Apr-23 remained within the RBI’s target range (2-6%) for the second consecutive month.
• Headline WPI inflation in Apr-23 retreated to negative territory after a gap of 33-months i.e almost three years.
  
• Core retail and wholesale inflation moderated to an 11-month low of 5.48%YoY and 41-month low of -1.77% YoY in Apr-23 respectively.

Key highlights of CPI inflation

• Annualized Headline CPI of 4.70% YoY in Apr-23 was below market expectations (Refinitiv: 4.80%).
• The 0.51% MoM momentum in Apr-23 was stronger than Mar-23 momentum of 0.23%, but well below the pre-Covid average sequential increase of 0.69% usually seen in the month of April.
• Food and Beverages index rose by 0.56% MoM in Apr-23 from 0.23% MoM in Mar-23 and 1.43% in last April. The acceleration in food prices was due to unfavorable but expected summer seasonality coupled with adverse impacts arising from a heatwave followed by unseasonal rains/ hailstorms in certain parts of the country. The top 3 sub-categories contributing to the sequential upturn were Fruits (3.95% MoM), Vegetables (1.70% MoM), and Spices (1.53% MoM). On the other hand, the bottom 3 sub-categories contributing to easing price pressures were Eggs (-3.20% MoM), Edible Oils (-2.40% MoM), and Cereals (-0.34% MoM).
  
• On sequential basis, comfort can be found in easing price pressures in cereals for the second consecutive month, due to open market sales conducted by the Food Corporation of India and healthy output in the Rabi harvest season.
• On annualised basis, fuel and light inflation dropped to a 25-month low of 5.52%YoY in Apr-23 due to normalisation in energy prices, from 8.79%YoY in Mar-23.
• Sequential momentum in core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous) rose to 0.45% MoM in Apr-23 from a 21-month low of 0.23% MoM in Mar-23. However, amidst a favourable base, inflation rate under this category moderated to an 11-month low of 5.48% in Apr-23 from 5.89% in Mar-23.
• Within core, Clothing and Footwear inflation moderated to a 19-month low of 7.47%YoY in Apr-23 from 8.18%YoY in Mar-23; while Personal, Care and Effects inflation rose to 9.0%YoY from 8.25% in Mar-23 owing to the safe-haven run-up in gold prices globally during the previous month.

Key highlights of WPI inflation

• WPI inflation moderated to a 34-month low of -0.92%YoY in Apr-23, retreating to negative territory after a gap of 33-months, from 1.34% in Mar-23.

• Sequentially, WPI remained unchanged (0.00% MoM) in Apr-23 for the second consecutive month.

• At a granular level, gain in the Primary article index (1.31% MoM) was offset by moderation in Fuel and Power (-2.68% MoM) and Manufacturing indices remaining unchanged (0.00% MoM).

• Price pressures in the primary index were led by a sequential increase across all sub-categories barring Non-food. Prominent sub-categories contributing to the sequential upturn were Crude & natural gas (+3.47% MoM), Minerals (+2.30% MoM), and Food (+1.45% MoM).

• Core WPI (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages, Fuel & Power, and Primary: Crude Petroleum & Natural Gas) rose by 0.06%MoM from a contraction of 0.21% in Mar-23. Despite the sequential pick-up, Core WPI inflation eased further to -1.77%YoY from -0.34% in Mar-23 amidst a favourable base at play.

Outlook

The continued deceleration in headline inflation in Apr-23 at both the retail and wholesale level has been comforting. For both the metrics, in addition to a favourable base, easing of food price pressures amidst the moderation of global food prices and the impact of Government’s administrative measures were in evidence particularly with respect to cereal prices. Moreover, core CPI and WPI inflation are exhibiting signs of moderation on account of further softness in most commodity prices along with a slowdown in global demand. Accompanied by the unchanged level of fuel prices in the CPI basket, it is comforting that headline CPI inflation remained within the RBI’s target range (2-6%) for the second consecutive month. 

Having said so, the possibility of El Nino conditions likely evolving during the later summer months could potentially push up food prices. While IMD in its First Range forecast had predicted a ‘normal’ rainfall at 96% of LPA for Southwest monsoon, we await the Second Range forecast to be released later this month for an updated view. Another private forecaster, Skymet has predicted a ‘below normal’ monsoon at 94%. In addition, firmness in crude oil prices if any, amidst a stronger than expected recovery in China, production cuts by OPEC+ and escalation of geopolitical uncertainty could serve as an added potential upside risks to CPI inflation.

From a monetary policy perspective, we expect the central bank to maintain a pause and gradually scale back liquidity surplus to push monetary policy transmission. Potential risks notwithstanding, we see a faster moderation in headline CPI inflation in FY24 than core inflation. The latter could prove somewhat sticky amidst the strong growth momentum continuing in services, especially contact intensive ones. For now, we maintain our FY24 CPI inflation projection of 5.3%.

Says Suman Chowdhury, Chief Economist and Head-Research “While a continuing moderation in the monthly CPI inflation print was expected, the figure of 4.70% for Apr-23 has pleasantly surprised on the downside as compared to 5.66% in Mar-23. This is the first time that the YoY inflation print is lower than 5.0% since Nov-21. Clearly, the base factor has a large role in the significantly lower figure since Apr-22 CPI figure at 7.79% was the peak in the last calendar year.  However, the sequential trend in food and beverages inflation has also been relatively benign as compared to last April. The core inflation (ex-food and fuel) is estimated to have dipped well below 6.0%, something that will offer comfort to the policy makers and the central bank. 

In our opinion, RBI MPC will continue to keep the pause button pressed for the remainder of the current calendar year unless there are any major surprises on the monsoon and the global front. The bond yields have seen some moderation with 10 yr bond yields slipping below 7% amidst the favourable inflation figure, the expectation of a pause from Fed in the near term and also factors such as the higher demand for govt bonds due to increased SLR requirements of the merged HDFC Bank. However, it will be difficult to sustain the yields at sub 7% levels given the borrowing plans of the Central and the State Governments.”

Table 1: Key highlights of CPI inflation

Chart 1: CPI and WPI inflation have been decelerating after peaking out in Q1 FY23

Chart 2: Core retail inflation finally seems to be taking a downward trend