India’s CPI inflation eased to a 3-month low at the beginning of 2024, coming in at 5.10%YoY in Jan-23 compared to 5.69% in Dec-23, in line with market consensus estimate.

Key highlights of Jan-24 CPI inflation

Sequentially, CPI index moved lower by 0.11% MoM in Jan-24 in line with the seasonal moderation typically seen at the start of the year, building on the moderation of 0.32%MoM recorded in Dec-23. 

• The sequential decline was led by the Food & Beverages basket that fell by 0.58% MoM. This was on account of a fall in prices of vegetables (-4.2% MoM), fruits (-2.0% MoM), spices (-1.3% MoM), pulses (-0.9% MoM), and oils & fats (-0.7% MoM) which is typically expected in the winter season. 
  1. Within the vegetable basket, price of TOP (Tomatoes, Onions and Potatoes) – the typical volatile items, recorded a moderation for the second consecutive month owing to the arrival of winter crop. 
  2. Pulses and Sugar prices recorded their first monthly correction in last 11 and 10 months, to the tune of 0.92%MoM and 0.31%MoM respectively. 
  3. The onset of the price decline recorded in Spices in Dec-23, extended into Jan-24, the first back-to-back decline in nearly 3 years. 
  4. As such, the moderation in food prices appears to be acquiring a more broad-based character. Food inflation (excluding beverages) moderated to 8.30%YoY in Jan-24 from 9.53% previously. 
• The consolidated fuel index recorded a moderate sequential expansion of 0.29% MoM in Jan-24, led by firewood & chips and dung cake. On an annualized basis, the consolidated fuel inflation remained in deflation territory for the fifth consecutive month (latest print at -0.4% YoY).
• Core CPI (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) inflation slipped to 3.7% YoY in Jan-24 – to mark a fresh record low on the CPI data series. 

Outlook on inflation

Jan-24 CPI inflation data was comforting on several counts, beyond the moderation in headline. The deflation in fuel items and the record low core inflation, continue to offset the strength in food inflation. 

• We do see dissipation in food price pressures in categories such as pulses, spices and sugar which has been sticky for a longer duration. Impact of past administrative interventions appear to be also be exerting some downside. 
• For fuel inflation, a mild moderation in crude oil prices despite heightened geopolitical risks remains heartening although it will continue to remain vulnerable to any escalation of such risks.
• In case of core inflation, while lagged impact of past monetary tightening is playing out, an outsized impact appears to be influenced by waning of supply chains bottlenecks post Covid along with investment in infrastructure, led by public capex. 
• While food inflation is enjoying the winter seasonality, we intend to keep a close watch on Rabi prospects amidst possibility of warmer temperatures leading to shrivelling of crop. However, predictions of El Nino turning neutral by Apr-May-24, augurs well for Southwest monsoon outturn in 2024. 
• The re-routing of maritime trade activity around the Cape of Good Hope from the Red Sea earlier, has led to an escalation of global trade costs and delivery timelines. With the impact being more material in case of construction material and agriculture goods (as per S&P global PMI surveys), potential spillovers to India’s CPI inflation with a lag cannot be ruled out if tensions continue to persist. 
• Overall, we believe that the disinflationary momentum would continue into FY25. We maintain our CPI inflation forecast of 5.4% in FY24. However, we believe that the RBI forecast of 4.5% for FY25 still carries significant upside risks. 

Says Suman Chowdhury, Chief Economist and Head- Research, Acuité Ratings & Research “CPI inflation for Jan-24 has been slightly more benign than our expectations at 5.1% YoY, a 60 bps drop compared to the print in Dec-23. Clearly, the reading has benefitted from the base factor with the headline figure having been high at 6.5% in Jan-23. Nevertheless, food inflation continues to be relatively high at 8.3% YoY as compared to 6.0% YoY in the previous January, typically a favourable month for food prices. Although there has been a sequential contraction, vegetable and pulses inflation continue to be a concern at 27.0% and 19.5% YoY respectively; while cereal inflation appears to have subsided to 7.8% in Jan 2024, the sequential rise of 0.75% MoM is noteworthy. 

While RBI has projected an average CPI inflation of 5.0% for the current quarter, it’s likely to be higher at around the levels of 5.0%-5.2%. The upside risks from the continuing El Nino phenomenon and its impact on the rabi crop output can’t be discounted at this point in time. However, the retail core inflation is estimated to stand at 3.7% in Jan-24, providing comfort to the central bank. 

In the latest MPC meeting, RBI has indicated its close watch on the “last mile of disinflation’. In our opinion, any change in the monetary policy stance and any rate cut is unlikely before Aug-24. The rate decision by Fed and other developed nations will also be a factor in the MPC stance in the current calendar year apart from the domestic inflation trajectory.” 

Table 1: 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: Some of the sticky food components, such as Pulses, Sugar and Spices have seen a nascent correction in sequential price pressures

Chart 2: Decline in maritime trade through Red Sea region offset by increase in trade around the Cape of Goof Hope, but at higher trade costs and delivery lags