- India’s CPI and WPI inflation continued to moderate in Dec-22 with a print of 5.72% YoY (12-month low) and 4.95% YoY (22-month low) respectively.
- Moderation in both headline CPI and WPI inflation was accompanied by a sharp sequential fall in overall prices, esp. of non-core items.
- However, the divergence in core inflation at retail and wholesale level continues to persist and in fact widened in Dec-22.
- While concerns on core CPI inflation continue to persist, with services exhibiting stickiness, fast deceleration in WPI inflation and expectation of moderation in domestic growth momentum bodes well for a lower trajectory of CPI inflation.
- We revise lower our FY23 CPI inflation forecast to 6.5% from 6.7% earlier and acknowledge the likelihood of a moderation in the print towards 5.0-5.5% in FY24.
- From monetary policy perspective, we continue to expect the RBI to announce a 25 bps rate hike in the Feb-23 policy review although the latest print has slightly increased the likelihood of a pause.
India’s CPI and WPI inflation continued
to moderate in Dec-22 with a print of 5.72% YoY (12-month low) and 4.95% YoY (22-month
low) respectively. More importantly:
their respective monthly peaks in FY23, headline CPI and WPI inflation are now
lower by 208 bps and 1167 bps respectively.
remaining above the policy target band of 2-6% for ten months earlier in the
year, CPI inflation printed within the policy target band of 2-6% for second
month in a row.
Key highlights of CPI inflation
sequential basis, CPI fell by 0.45% MoM in Dec-22, the steepest decline in
23-months – although it is broadly in line with the series average of 0.39%,
seen in the month of December.
by supportive winter seasonality, Food and Beverages index fell by 1.35% MoM in
Dec-22, marking its second decline in last 9-months. The downside was predominantly
led by Vegetables (-12.7% MoM) and Fruits (-1.7% MoM).
the respite on food inflation was driven by perishables, which appear to have
benefitted from fresh mandi arrivals. However, price pressure in other parts of
the food basket, namely cereals and spices continue to persist. In addition, milk
prices continue to march ahead at a somewhat elevated pace. We note that the
lagged spillover impact of elevated agri input prices could keep food inflation
pressures on the table. However, with PMGKY being discontinued from Jan-23 and rabi
sowing progressing at a healthy pace (up 6.4% as of Dec 22), upside risk to
food inflation could get neutralized.
fuel prices rose by 0.35% MoM, with bulk of the increase coming from hike in
kerosene prices along with hardening of coke, charcoal, and dung cake prices.
momentum in core inflation (CPI ex indices of Food & Beverages, Fuel &
Light, and petrol and diesel items within Miscellaneous) moderated to 0.34% MoM
in Dec-22 from 0.40% in Nov-22 with incremental price pressures seen in case of
services like Health (0.72% MoM) and Personal Care (1.27% MoM). The annualized
rate of inflation under this category remained unchanged at 6.3% in Dec-22.
Key highlights of WPI inflation
WPI fell by 1.12% MoM, recording its largest monthly fall in 31-months.
incremental decline in Dec-22 was led predominantly on account of non-core
factors, viz., food and fuel. Consolidated food & beverages index fell by
2.26% MoM – its largest downward movement in 24-months. In comparison,
consolidated fuel index declined by 2.60% MoM – a 4-month low.
contrast, core WPI (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages,
Fuel & Power, and Primary: Crude Petroleum & Natural Gas) remained
unchanged in Dec-22 after falling for three previous months. Nevertheless,
annualized core inflation eased on account of favorable statistical base to a
26-month low of 3.15% in Dec-22 from 3.76% in Nov-22.
Moderation in both headline CPI and WPI
inflation in Dec-22 was accompanied by a sharp sequential fall in overall
prices. Noticeably, the decline was primarily on account of non-core factors,
viz. food and fuel.
easing of food inflation is comforting amidst kicking in of favorable winter seasonality
(with arrival of kharif produce) at both wholesale and retail levels.
Juxtaposed with the ongoing decline in global food prices and pick-up in
domestic rabi sowing, one is hopeful of a relatively benign scenario in
the near-term on food inflation.
fuel inflation inched up in case of CPI inflation, it eased in case of WPI
inflation with pass-through of lower international commodity prices. In
contrast, retail price of petrol and diesel remained broadly unchanged.
Having said so, the
divergence in core inflation at retail and wholesale level continues to
persist, and in fact widened in Dec-22. Although Core WPI inflation continued
its descent, Core CPI inflation has remained fixated above 6%. The divergence
between them manifests (i) relatively strong linkage of Core WPI basket to
international commodity prices, and (ii) dominance of services (non-tradables)
in Core CPI basket. While the former has been on a correction path since
mid-2022, pick-up in services activity and increased domestic demand has
enabled a higher and a faster reset in prices.
Stickiness in core retail inflation at elevated
levels has been a cause of concern for the MPC of the RBI. As such, this would
continue to prompt incremental rate tightening from the central bank.
However, there is also silver lining. Sharp
deceleration in WPI inflation will ease input price pressures in the coming
months. Juxtaposed this with the expectation of moderation in domestic growth
impulses, and the case for a downward trajectory in CPI inflation becomes
reasonably strong. In fact, post two successive months of downside surprise in
CPI inflation, we now mark lower our FY23 CPI inflation estimate to 6.5% from
6.7% earlier. Going forward, CPI inflation is widely expected to moderate
towards 5.0-5.5% range in FY24.
From monetary policy perspective, this would
imply limited room for incremental hikes. As such in our base scenario, we
continue to expect the RBI to opt for a pause after announcing a 25 bps rate
hike in Feb-23 policy review. However, the likelihood of a pause in Feb-23 has
slightly increased after the release of the latest inflation data.
Table 1: Key highlights of CPI inflation
Chart 1: Sharp deceleration in core
WPI to have a partial lagged impact on core CPI