Overview

India’s CPI and WPI inflation moderated in Mar-23 to a 15-month low and a 29-month low of 5.66% YoY and 1.34% YoY respectively. More importantly:

• Annualised headline CPI and WPI inflation eased by 78 bps and 251 bps respectively over the previous month.

• Notwithstanding the consistent moderation at headline level, both inflation metrics diverged sequentially in Mar-23 with CPI rising to 0.23% MoM and WPI remaining unchanged (0.00% MoM).

• After a hiatus of 2-months, headline CPI inflation reverted to RBI’s target range (2-6%).

Key highlights of CPI inflation

• The 0.23% MoM momentum in Mar-23 is broadly in line with the pre-Covid average sequential increase of 0.22% MoM usually seen in the month of March typically due to a seasonal firmness in perishable food items.

•  Food and Beverages index also rose by 0.23% MoM in Mar-23 from a contraction of 0.06% MoM in Feb-23. Along with the unfavourable summer seasonality, the acceleration in food prices was also due to the adverse impact of the heatwave followed by unseasonal rains/ hailstorms in certain parts of the country. The top 3 sub-categories contributing to the sequential upturn were mostly perishables like Fruits (3.67% MoM), Vegetables (1.73% MoM), and Milk (0.62% MoM). On the other hand, the bottom 3 sub-categories contributing to easing price pressures were Eggs (-4.42% MoM), Edible Oils (-2.55% MoM), and Cereals (-0.40% MoM).

• The moderation in the increased cereal prices can be attributed to the steps taken by the Central Government such as the open market sale of wheat from the buffer stocks to cool down market prices. The ban on wheat exports have persisted since May 2022, given the continuing risks of a lower wheat harvest in the concluding rabi season.

• Milk and milk products inflation continue to be near double digit at 9.3% YoY in Mar-23 and on a sequential basis, the inflation has been higher than 0.5% MoM since Mar-22.

• Spices inflation has cooled down to 0.1% MoM in Mar-23 though the annualized print continued to be high at 18.2%.

• Consolidated fuel and housing index remained unchanged on sequential basis (0.0% MoM for both). Despite this, housing inflation, rose to over a 4-year high of 4.96% YoY in Mar-23 from 4.83% in Feb-23.

• Sequential momentum in core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous) moderated to a 21-month low of 0.28% MoM in Mar-23 from 0.40% in Feb-23. The annualized rate of inflation under this category posted a moderation to 6.00% in Mar-23 from 6.34% in Feb-23.

• Clothing and Footwear inflation moderated to a 16-month low of 8.18% YoY in Mar-23 from 8.79% in Feb-23.

Key highlights of WPI inflation

• WPI inflation has been on a consistent decline since last fiscal and moderated to a 29-month low of 1.34%YoY in Mar-23 from 3.85% in Feb-23, the steepest decline in 4 months.

• Sequentially, WPI remained flat (0.00% MoM) in Mar-23 vs. an increase of 0.13% MoM seen in Feb-23.

• At a granular level, gain in the Primary article index (1.16% MoM) was offset by moderation in Fuel and Power (-1.26% MoM) and Manufacturing indices (-0.28% MoM).

• Price pressures in the primary index were led by a sequential increase across all sub-categories barring Non-food. The sub-categories contributing to the sequential upturn were Minerals (14-month high at +8.16% MoM), Crude & natural gas (+4.61% MoM) and Food (+1.13% MoM). The non-food sub-category witnessed a contraction of 2.05% MoM in Mar-23, over and above a contraction of 1.90% in Feb-23.

• The consolidated Food & Beverages index rose by 0.47% MoM in Mar-23 from a contraction of 0.13% in Jan-23.

• Core WPI (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages, Fuel & Power, and Primary: Crude Petroleum & Natural Gas) slipped into a contraction of -0.84% YoY in Mar-23, a 33-month low, from 1.65% in Feb-23.

Outlook

Favourable statistical base effects coupled with lower input costs helped both CPI and WPI inflation drift lower in Mar-23. Easing of food inflation seems encouraging along with the ongoing decline in global food prices and IMD predictions of a ‘normal’ monsoon outturn in the upcoming Jun-Sep season. Moreover, core retail and wholesale inflation are exhibiting early signs of moderation on account of incremental softness in most commodity prices along with a slowdown in global demand. Overall, it is comforting that headline CPI inflation has reverted to the RBI’s target range (2-6%) after a gap of 2 months.

Having said so, the possibility of El Nino conditions likely evolving during the later summer months could potentially push up food prices. In addition, the recent rally in crude oil prices following the surprise announcement of a cut in product by OPEC+ if were to sustain or see further upside, could serve as an upside risk to inflation.

From monetary policy perspective, we expect the central bank to maintain a prolonged pause and gradually scale back liquidity surplus to push monetary policy transmission. However, impact of global economic uncertainties on growth-inflation dynamics keeps the door open for incremental rate hikes in the near future. Potential risks notwithstanding, we see a steady moderation in headline CPI inflation in FY24 as compared to core inflation. We maintain our FY24 CPI inflation projection of 5.3%.

Says Suman Chowdhury, Chief Analytical Officer “The headline CPI inflation has moderated substantially to 5.66% in Mar-23 from 6.44% in Feb-23, providing some relief to the central bank and the government. While the average inflation for Q4FY23 still stands at 6.21%, the drop of around 80 bps in the March print partly validates the “pause’ stance taken by the MPC in the earlier part of the current month. The cooling in the food prices has been instrumental in driving down the inflation levels with the food and beverages inflation sliding down from 6.26% YoY in Feb-23 to 5.11% YoY in Mar-23. Except for a slight seasonal sequential uptick in fruit and vegetable prices and an upward pressure on milk prices, those in other categories have either declined or remained largely stable. The sale of wheat from the buffer stocks in the open market by the government has helped to moderate the prices of cereals, a key factor in pushing up the inflation in the last two months.

What will also bring in comfort is a meaningful drop in core inflation YoY. If there are no surprises on the weather and the oil front, one can expect the headline inflation to moderate further and settle in the band of 5.0%-5.5% over the next few months. Such a trend is likely to support the continuation of the pause although a pivot on rates is still some distance away.”

Table 1: Key highlights of CPI inflation

Chart 1: CPI and WPI inflation have been decelerating after peaking out in Q1 FY23