Overview

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.
• Both inflation metrics recorded a positive sequential momentum of similar magnitude - WPI rose by 0.20%MoM while CPI posted a relatively smaller increase of 0.17%MoM.
• Despite a slight moderation in the headline print, CPI inflation remains well above RBI’s target range (2-6%) for the second consecutive month.
• There 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 inflation

• 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 respectively.

•  While 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. 

• The 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.

• In 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 costs.

• Consolidated fuel inflation eased on both sequential (0.05% MoM) as well as annualized (7.8% YoY) basis.

• Sequential 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

• WPI 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.

• Sequential 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 ATF (+4.4%MoM).

• In 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 Jan-23.

• Core 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.

Outlook

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