- India’s inflation at retail and wholesale level diverged in Jan-23 with the CPI print unexpectedly rising to 6.52% YoY (3-month high) while WPI eased slightly to 4.73% YoY (24-month low).
- What is noteworthy is the reversal of the declining trend on a sequential basis with a positive growth MoM in both inflation indices.
- While easing food prices had helped both WPI and CPI inflation drift lower over months of Nov-Dec-22, it was observed that some components in the food index (esp. non-perishable items) have actually been responsible for a sharp increase in Jan-23.
- Concerns on core CPI inflation continue to persist, with the print holding steady at 6.3% over the last three months given the strong momentum seen particularly in the services inflation.
- The strong upside surprise in Jan-23 CPI print could potentially result in Q4 FY23 inflation coming in close to 6.0%, higher than RBI’s estimate of 5.6%. In addition, it could potentially result in full year inflation averaging at 6.7%, i.e., 20 bps higher than Acuite and RBI’s estimate of 6.5%.
- Although we continue to expect FY24 CPI inflation to moderate to 5.3% (on account of moderate relief from commodity prices and impact of lower growth momentum), likelihood of a breach of inflation targeting band again in Q4 FY23 will 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. Thereafter, the MPC may choose to leave the door open for incremental rate hikes by turning data dependent.
India’s inflation at retail
and wholesale level diverged in Jan-23 with the CPI print reversing its
downward trend and rising to 6.52% YoY (3-month high) while WPI slightly eased
to 4.73% YoY (24-month low). More importantly:
- Notwithstanding the divergence at headline
level, both inflation metrics depicted a rising sequential momentum, albeit
with a significant difference in magnitude – while CPI rose by a significant 0.46%
on MoM basis, WPI posted a relatively smaller increase of 0.13% MoM over the
Key highlights of CPI inflation
increase in CPI index marks the steepest sequential momentum seen in the month
of January compared to the series average of -0.17% MoM before the latest print.
Typically, the headline inflation witnesses a seasonal sequential decline in
the month of January due to the benign prices of perishable food items.
and Beverages index rose unexpectedly by 0.45% MoM in Jan-23 vs. the series
average of -0.76% MoM usually seen in January. The upturn was led by Cereals (2.60%
MoM), Eggs (2.26% MoM), Spices (1.56% MoM), and Meat & Fish (0.81% MoM). On
the other hand, price pressures were seen easing in case of Vegetables (-3.75%
MoM), Edible Oils (-0.64% MoM), and Sugar (-0.57% MoM).
in food inflation was driven by non-perishables, which rose to over a 9-year
high of 9.5% YoY in Jan-23, with prices of Spices, Cereals, Milk, and Eggs continuing
to march ahead at an elevated pace. However, with healthy rabi sowing and
a normal monsoon assumed in CY23 along with expected steps from government to
cool down any spurt in food prices, upside risk to food inflation could get
jump in CPI was led by the sub-indices of Housing (0.82% MoM) and Miscellaneous
(0.47% MoM). Within
Miscellaneous index, the upsurge was led by Personal Care and Effects (10-month
high of 1.59% MoM), Health (0.66% MoM), and Household Goods and Services (0.44%
MoM). On annualized basis, this pushed core inflation further(CPI ex indices of
Food & Beverages, Fuel & Light, and petrol and diesel items within
Miscellaneous) to 6.5% YoY in Jan-23 from 6.3% YoY in Dec-22. Clearly,
heightened core inflation is one of the key concerns of policy makers at this
fuel prices remained unchanged on both sequential (0.0% MoM) as well as
annualized basis (8.5% YoY).
Key highlights of WPI inflation
- WPI inflation
moderated to 4.73% YoY in Jan-23 from 4.95%YoY in Dec-22 on account of
favorable statistical base, even as the index rose sequentially, marking its
largest monthly rise in 3-months.
incremental gain in Jan-23 was led predominantly by the Consolidated Food &
Beverages index that rose by 0.59% MoM.
comfort, the Consolidated Fuel index declined by 1.34% MoM.
WPI (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages, Fuel &
Power, and Primary: Crude Petroleum & Natural Gas) moderated to a 27-month
low of 2.62% YoY in Jan-23 from 3.15% YoY in Dec-22.
While favourable statistical base effect helped WPI
inflation drift lower in Jan-23, both inflation indices registered a sequential
rise driven by surging prices of food and services at wholesale and retail
levels. Having said so, the divergence in inflation at retail and wholesale
level continues to persist, and in fact widened in Jan-23. Although WPI inflation continued its descent, CPI
inflation rose to a 3-month high of 6.52% YoY. The divergence between them
manifests (i) relatively strong linkage of WPI basket to softening global
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 has enabled an acceleration in prices and has been
responsible for a stickiness in core CPI inflation.
However, there is also silver lining. Juxtaposed with lower
commodity prices vis-à-vis average levels in 2022, expected moderation in
domestic growth impulses, assumption of a normal monsoon in CY23, and a healthy
rabi sowing (cultivation ended with 3.3% increase in acreage over the previous
sowing season), one is hopeful of food price pressure easing, allowing for a gradual
downward trajectory in CPI inflation In FY24. As such, we maintain our FY24 CPI
inflation projection of 5.3%.
However, the steep upward surprise in Jan-23 CPI
inflation data could push Q4 FY23 CPI inflation towards 6.0%, higher than RBI’s
projection of 5.6%. In addition, it could potentially result
in full year inflation averaging at 6.7%, i.e., 20 bps higher than Acuite and
RBI’s estimate of 6.5%.
From monetary policy perspective, the likelihood of a
breach of inflation targeting band in Q4 FY23 would continue to impart a sense
of vigil and hawkishness in RBI MPC. As such, we maintain our call of a 25 bps
rate hike in the Apr-23 policy review. It is also likely that we need to wait
longer for the much awaited change in stance in monetary policy from
“withdrawal of accommodation” to “neutral”. After April, the MPC could choose
to leave the door open for incremental rate hikes by turning data dependent.
Table 1: Key highlights of CPI inflation
Chart 1: CPI and WPI inflation depicted a divergent trend
at headline level in Jan-23
Chart 2: All not well on the inflation front
Chart 3: Fresh Concerns on Food (F&B)