- India’s CPI and WPI inflation moderated in Feb-23 with a print of 6.44%YoY and 3.85%YoY (25-month low) respectively, broadl9y in line with market expectation.
- Despite the modest moderation, headline CPI inflation remains well above RBI’s target range (2-6%) for the second consecutive month.
- While the print in Nov-Dec’22 had dropped below 6% after a long stint above that level for a ten month period (Apr-Oct’22), it proved to be transient with the figure rising again above that level in Q4FY23.
- Given the data of the past two months (Jan-Feb’23), it is highly likely that the average CPI inflation print for the last quarter of the current fiscal will come between 6.2%-6.4%, materially higher than the last RBI forecast of 5.7%.
- Steady deceleration in WPI inflation offers little comfort as concerns on core CPI inflation continue to persist, with services’ inflation exhibiting stickiness along with the possibility of El Nino imparting an upside risk to food prices.
- From monetary policy perspective, we maintain our call
of a 25 bps rate hike in the Apr-23 policy review. Having said so, on watch
would be the risk of further deterioration in the US banking system that
could likely alter the monetary
policy response - towards a pause in the Apr-23 MPC meeting, leaving the
central bank to turn more data dependent in a bid to balance better growth-inflation
India’s CPI and WPI inflation
moderated in Feb-23 with a print of 6.44% YoY and 3.85% YoY (25-month low)
respectively, broadly in line with market expectation. More importantly:
- While headline
CPI eased marginally by 8 bps, WPI inflation declined by 87 bps respectively over
the previous month.
inflation metrics recorded a positive sequential momentum of similar magnitude
- WPI rose by 0.20%MoM while CPI posted a relatively smaller increase of
a slight moderation in the headline print, CPI inflation remains well above
RBI’s target range (2-6%) for the second consecutive month.
is a high likelihood that the average CPI inflation for Q4FY23 will be 50 bps
higher than the RBI forecast of 5.7%, given the trend seen in Jan-Feb’22.
Key highlights of CPI
- The drop
in sequential price pressures in headline CPI was driven by a downtick in the Food
and Beverages index, which fell by 0.06% MoM in Feb-23 from an unseasonal
uptick of 0.45% MoM seen in Jan-23. The downside was led by Eggs (-5.71% MoM),
Vegetables (-2.53% MoM), and Oils
and Fats (-1.71% MoM). On the other hand, price pressures have persisted in
case of Milk (+0.92% MoM), Fruits (+3.28% MoM) and Prepared Meals (0.52% MoM). Spices (0.53% MoM) and
Cereals (0.75% MoM) rose at the slowest pace in 15-months and 7-months
the sequential inflation in cereals have seen a dip, the YoY print has reached
a high of 16.7% in Feb-23, highlighting the concerns on the rice and wheat
output in the rabi and the upcoming kharif season if weather condition turn out
to be adverse.
moderate respite in food inflation was driven by heavy weight vegetable prices,
which appear to have benefitted from fresh mandi arrivals. However, price
pressure in other parts of the food basket, namely milk, continues to persist.
In addition, fruit prices too rose at a somewhat elevated pace,
due to an exceptionally warm Feb-23.
annualized terms, housing inflation rose to a near 3-1/2 year high of 4.83%YoY in
Feb-23 from 4.61% in Jan-23. Sequentially, price pressures were exceptionally
strong for the second month in a row, clocking a momentum of 0.81% MoM in
Feb-23 compared to 0.82% in Jan-23 which may be partly due to higher interest
fuel inflation eased on both sequential (0.05% MoM) as well as annualized (7.8%
momentum in core inflation (CPI ex indices of Food & Beverages, Fuel &
Light, and petrol and diesel items within Miscellaneous) moderated to 0.17% MoM
in Feb-23 from 0.46% in Jan-23. The annualized rate of inflation under this
category posted a mild moderation to 6.44% in Feb-23 from 6.52% in Jan-23
Key highlights of WPI inflation
inflation moderated to 3.85%YoY in Feb-23 from 4.74% in Jan-23 on account of the
favorable statistical base, even as the index rose sequentially by 0.20%MoM in Feb-23.
increase in Feb-23 WPI was predominantly on account of the Fuel and Power index
which rose by 1.93%MoM from a contraction of 1.39%MoM in Jan-23. Price
pressures were led by Naphtha (+16.5%MoM) and Furnace Oil (+6.2%MoM) along with
comparison, Primary index fell by 0.57%MoM in Feb-23 from an uptick of 0.64%
MoM in Jan-23 led by sub-categories of Non-food and Crude & natural gas..
- The consolidated
Food & Beverages index rose only by 0.05%MoM in Feb-23 from 0.33% MoM in
WPI (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages, Fuel &
Power, and Primary: Crude Petroleum & Natural Gas) moderated to a 28-month
low of 2.14% YoY in Feb-23 from 2.80% YoY in Jan-23.
While favourable statistical base effects helped both
WPI and CPI inflation drift lower in Feb-23, concerns of elevated core retail
inflation and stickiness in services inflation, continue to persist. In fact, a
sharp sequential rise for the second consecutive month in the housing index –
seen for the first time since the 7th Pay Commission HRA adjustments in late
2017, needs close monitoring. We note that core retail inflation has remained above
6.0% for the last eleven months, a concern that RBI has highlighted in its
recent policy commentaries. As such, this would continue to prompt incremental
rate tightening from the central bank.
While there is a base level expectation of an easing
of food inflation with the ongoing decline in global food prices and better
domestic rabi sowing, one cannot draw a durable comfort about the outlook on
food inflation. The predictions of a continuing heat wave in Mar-23 ahead of
the Rabi harvest and early prognosis of a below-normal Southwest monsoon due to
El Nino phenomenon could potentially push up food prices.
Having said so, some silver lining emerges from the
sharp deceleration in core wholesale inflation. Incremental softness in most
commodity prices amidst a slowdown in global demand (including crude oil) bodes
well for further easing of input price pressures. This could get more
prominently reflected in pass through to core retail inflation with a lag. Taking
into consideration the above-mentioned factors, we maintain our FY24 CPI inflation
projection of 5.3%.
From monetary policy perspective, the
likelihood of a breach of inflation targeting band in Q4 FY23 would continue to
keep RBI’s MPC vigilant. As such, we maintain our call of a 25 bps rate hike in
the Apr-23 policy review. However, on watch would be the risk of further
deterioration in the US banking system that could alter the monetary policy response
towards a pause in the Apr-23 MPC meeting, leaving the central bank to turn
more data dependent in a bid to balance growth-inflation dynamics.
Table 1: Key highlights of CPI inflation
Chart 1: Significant
WPI inflation moderation, only slight drop for CPI inflation
Chart 2: Categories
driving food inflation
Chart 3: Inflation