India’s CPI inflation remained virtually unchanged in Feb-24, coming in at 5.09% YoY (close to market consensus expectation of ~5.0%) vs. 5.10% in Jan-24.

Key highlights

• On sequential basis, CPI index moved up by 0.16% MoM in Feb-24, in line with the seasonal trend of 0.17% median monthly increase in the index usually observed in the month of February.
• Continued deceleration in core inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) to a new series low of 3.5% YoY remains the hallmark. In the current financial year, although the 2.5 percentage point decline in core retail inflation appears broad based, it is primarily led by categories like Clothing & footwear, Household goods & services, and Personal care & effects.
• The consolidated fuel inflation in annualized terms recorded its sixth consecutive negative print, with data for Feb-24 coming in at -0.6%. In the current data series (with 2012 as the base year), this has been the longest stint of negative fuel inflation. This is likely to continue with the proposed Rs 100 cut in LPG announced by the government in the current month. 
• Meanwhile, food and beverage inflation moved a tad up from 7.58% YoY in Jan-24 to 7.76% in Feb-24. On sequential basis, the food basket recorded a positive momentum of 0.11% MoM, in contrast to median decline of 0.12% usually seen in the month of February, highlighting the risks of a further upsurge in case of hotter than expected conditions in the upcoming summer season.

o   Sequential price pressures were highest in case of Meat & fish (2.3% MoM), Cereals & products (0.5% MoM)

o   While Vegetables recorded a minor price drop of 0.1% MoM, the correction appears subdued compared to the supportive seasonality in February. Within the vegetables category, TOP (Tomato, Onion, and Potato) - an important source of volatility in food prices, recorded third back-to-back decline in prices amidst gradual improvement in supplies.

Inflation Outlook

The comfort on India’s headline CPI inflation is getting entrenched emphatically. The share of number of items in the CPI basket currently within the target band of 2-6% annualized inflation stood at 53.5%, the highest since Oct-16.

Having said so, weather related volatility as well as persistence in food inflation continues to remain a cause of concern. Over the last 12-months, food inflation has averaged at 6.8%, oscillating wildly from a low of 3.4%, to a high of 10.6%. However, there are early signs of a waning of El Nino conditions by May-24, which augurs well for a normal monsoon outturn in FY25. This could potentially help lower the elevation and volatility in food inflation in the upcoming quarters.

On the fuel front, we note that the recently announced Rs 100 cut in the price of domestic LPG cylinder help would bring down headline inflation by ~15 bps (impact spread over Mar-Apr). Furthermore, if global energy prices remain range-bound, then fuel inflation could continue to remain extremely benign, with likelihood of negative monthly prints persisting until Aug-24.

In case of core inflation, while support from post Covid recovery in supply chains continues to play out, low input price inflation for producers along with soft domestic consumption demand has been providing an additional downward bias. In addition, the current phase of public investment led growth momentum has ensured a softer bias for core inflation in FY25.

Overall, for FY24, we maintain our call of CPI inflation to average at 5.3%. Thereafter, inflation is likely to glide lower to 4.8% in FY25. While geopolitical risks could provide an upside risk, a well-balanced monsoon outturn could impart a downside risk to our estimate.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research Ltd, “CPI inflation for Feb-24 remained at the same level as in Jan-24 at 5.1%, largely in line with our expectations. While RBI has estimated the headline print to be at 5.0% in the current quarter, it is likely to be a tad higher at 5.1%-5.2%. The stickiness at the headline level has been largely due to persistent pressures in food inflation. Interestingly, the mild sequential uptick in the index has been largely contributed by the meat and the fish category where inflation hit 5.2% vs 1.2% in the previous month. Cereal inflation also continued to be high at 7.6% with a sequential rise from Jan-24. However, there has been a sequential contraction in vegetables and pulses although the annualized inflation in these categories still remain very high at 30.2% and 18.9%, respectively. Going ahead into the summer months, hotter weather conditions can raise the upward risks for food inflation.

Nevertheless, the core inflation (excluding all food and fuel components) declined further from 3.7% in Jan-24 to 3.5% in Feb-24 and will continue to be a comfort factor for the central bank. We expect RBI to maintain the status quo on the monetary policy till August 2024.” 

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: Inflation moderation has acquired a broad-based character