India’s inflation metrics diverged in Jun-23, with CPI inflation rising more than expected even as WPI inflation continued to wane. CPI inflation rose from a 25-month low of 4.31%YoY in May-23 (revised from 4.25%) to 4.81% in Jun-23. WPI inflation contracted by 4.12%YoY compared to -3.48% in the previous month. More so -

• CPI inflation in Jun-23 remained within the RBI’s target range (2-6%) for the fourth consecutive month. As such, on a quarterly basis, inflation printed in the range for the first time in last 5 quarters.
• In addition, Q1 FY24 CPI inflation at 4.6% is exactly in line with RBI’s forecast.
  
• Jun-23 WPI inflation remained in negative territory for the third successive month.

A granular look:

• Sequentially, CPI rose by 1.01% MoM in Jun-23, higher than the series average of 0.89% MoM change usually seen in the month of June.

• Food and Beverages index clocked a robust sequential momentum of 2.18% MoM in Jun-23 higher than the series average of 1.42% MoM change usually seen in the month of June.
• The surge was broad-based led by - Vegetables, Pulses, Eggs, Meat & Fish, Spices, and Sugar and Confectionery. Of these, the increase in vegetables prices capture the sharp rise seen in tomato prices last month, to the tune of nearly 70% as per high frequency Mandi data. Tomato production in the country has been adversely impacted by unusual heat followed by unseasonal rains in the early part of 2023, delayed onset of Southwest monsoon along with pest attacks.
  
• Consolidated fuel index ticked up 0.06%MoM with annualized inflation increasing marginally to 3.0% in Jun-23 from 2.1% in May-23 on account of adverse statistical base.
• On a positive note, imputed core inflation index remained unchanged, with inflation for the category easing to a 20-month low of 5.4%, indicating that it has shed some of its earlier stickiness.
  
• WPI index declined by 0.4%MoM sequentially in Jun-23, compared to 0.99% in May-23, as food led increase in momentum of Primary articles was offset by lower price pressures in other categories of Fuel & power and Manufacturing. Akin to CPI, within food, price increase was dominant in case of Vegetables, Cereals, Pulses, Eggs, fish & Meat
  
• Core-WPI inflation contracted by 2.06%YoY – remaining in contraction for the fourth consecutive month.

Outlook

Clearly, the tide for CPI inflation has turned, with May-23 marking the trough in the current phase of inflation cycle. To be sure, while weather related impact and the dilution of the favourable base were expected to push CPI inflation higher Jun-23 onwards, the unanticipated skyrocketing of vegetable prices like that of tomatoes over Jun-Jul-23 (so far), has imparted an upside risk to Q2 FY24 CPI prints.

Nevertheless, we believe that food price pressures could however wane over the next 2-3 months owing to –

• Sequential correction in tomato and other vegetables prices follows Kharif season’s output that is likely to hit market in Aug-Sep-23.

• Recent catch-up in Southwest monsoon at a cumulative surplus of 1% for the season (as of 14th Jul-23), should help push Kharif sowing further. 
• EL Nino though remains on watch, its intensity declined in Jun-23 as captured by the Southern Oscillatory Index (SOI) moving into a neutral zone.
  
• Indian Ocean Dipole, is expected to turn positive over Jul-Aug-23, and it remains a strong counter force to El Nino.
• Administrative measures, as seen for pulses (tur dal) in the form of stock holding limits, higher imports as well as open market sales.

For the year, we continue to hold on to out CPI inflation forecast of 5.3% in FY24. While the comfort on global crude prices may possibly allow a correction in domestic retail fuel costs in the foreseeable future, the volatility in price of perishables as well as the risk of El Nino preclude a revision as of now.

Says Suman Chowdhury, Chief Economist and Head – Research “CPI headline inflation of Jun-23 has moved up again and slightly above expectations to near 5.0%. As anticipated, this has been largely driven by higher food inflation which has jumped up to 4.6% YoY from 3.3% in May. Sequentially, the CPI has risen by 1.0% with the food and beverage index going up sharply by 2.2% in Jun-23. Understandably, this has been driven by vegetable prices, which witnessed a sequential inflation of 12.2% in the month. Some vegetable items such as tomatoes have seen a spurt in prices due to irregular rainfall but there have been a rise in prices of other food items as well mainly egg, pulses and spices. We, however, believe that such price rise will be temporary if the monsoon doesn’t show any significantly deviant behavior in Aug-Sep’23 due to the El Nino phenomenon. Further, the government have been taking steps from time to time to cool down the prices of cereals, edible oil and pulses and similar steps are likely to be taken going forward.  

Core inflation remained stable in the month but still remains relatively high compared to the comfort level of RBI MPC. In our opinion, the upside risks to inflation are hinged to the El Nino and the monsoon performance in the current year. We have retained our average forecast at 5.3% for CPI inflation in FY24 although MPC has pegged it to 5.1%. We believe that RBI will continue with its pause stance for an extended period possibly till Dec-23 to watch for such risks while also assessing the impact of the 250 bps rate hike on the economy.”

Table 1: CPI Inflation at a glance

Chart 1: Pick up in rainfall activity could help ease food price pressures