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May-23 Inflation: Comfort getting broad-based

14 Jun 2023



  • India’s economy appears to have transitioned to a relatively benign inflation regime with the inflation indicators continuing to decline in May’23 - CPI and WPI inflation printed at a 25-month low and 90-month low of 4.25% YoY and -3.48% YoY respectively.

  • Subdued impact of adverse summer seasonality on food items, supportive statistical base effect, and gradual moderation in output prices (on account of softness in commodity prices) are seen to be behind the recent moderation in headline inflation.

  • This trend is comforting as it marks three successive prints of CPI inflation within RBI’s policy target band of 2-6%.

  • Despite the recent downward trend in CPI inflation turning out to be larger than anticipated earlier, we maintain our FY24 CPI inflation projection of 5.3% as El Nino risks have become non-trivial. In addition, a somber start to the monsoon season and a moderate step-up in Kharif MSPs indicate upward risks to the currently low food inflation. 

  • Having said so, we continue to expect average inflation pressures to moderate in FY24 led by non-core factors, with disinflation in core items facing downward rigidity due to outperformance of services sector activity compared to manufacturing.

India’s inflation indicators continued to decline in Apr-23 - CPI and WPI inflation printed at a 25-month low and 90-month low of 4.25% YoY and -3.48% YoY respectively. More importantly, this marks three successive prints of CPI inflation within RBI’s policy target band of 2-6%. 

Key highlights of May-23 CPI inflation

  • Sequentially, CPI rose by 0.51% MoM and the momentum appears moderate vs. the usual sharp seasonal build-ups associated with summer months..
  • Lower than usual impact of adverse summer seasonality is captured by the food basket that showed a restrained increase of 0.62% MoM. Pre-monsoon showers in select regions, lesser intensity of heat waves and the continued decline in price of cereals and edible oils played a key role. In contrast, spices and protein items sprang to a strong sequential jump.
  • Consolidated fuel basket rose by 0.41% MoM after remaining almost unchanged for 4-months with bulk of the price increase driven by electricity tariff revisions and kerosene.
  • Sequential momentum in core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) moderated to 0.45% MoM from 0.62% MoM in Apr-23. The mild moderation appears to be broad based.

Key highlights of May-23 WPI inflation

  • Sequentially, WPI fell by 0.86% MoM vs. the series average of 0.70% MoM increase typically seen in the month of May (barring May-20, which saw a massive slide in commodity prices following the initial outburst of Covids).

  • The sequential decline is broad based across consolidated food, fuel, and core (WPI ex indices of Primary: Food, Mfg: Food, Mfg: Beverages, Fuel & Power, and Primary: Crude Petroleum & Natural Gas) categories. It is noteworthy that the annualized rate of inflation under all these three key categories (consolidated food at -1.44%, consolidated fuel at -9.88%, and core at -2.70%) is in deflation territory for the first time in almost 8-years.
  • The significant slide in WPI inflation from its peak of 16.63% YoY in May-22 is on account of the fall in international commodity prices (for the month of May-23, the Bloomberg Commodity Index and the India Crude Basket stood at -19.4% YoY and -31.3% YoY respectively).

Outlook on CPI inflation

The downward slide in CPI inflation in last 3-months is somewhat larger than anticipated earlier with support from decline in commodity prices offsetting the impact of unseasonal rains in Mar-23. Nevertheless, we maintain our FY24 CPI inflation forecast of 5.3% as international weather bureaus have upgraded their forecast of El Nino (this could potentially disrupt the south-west monsoon performance in India) even as the commencement so far has been sombre. While it is a bit premature to analyse the monsoon, rainfall so far in June currently stands at a deficiency of 45% of the long period average vs. IMD’s forecast of 8% deficiency for the entire month. In addition, we estimate the marginally higher announcement of Kharif MSPs to impart a modest 10-15 bps upside to headline CPI inflation.

Says Suman Chowdhury, Chief Economist and Head – Research “CPI headline inflation has declined faster than expectations partly supported by the higher base factor in the previous year. On a sequential basis, however, the inflation print has grown by 0.51% largely driven by the seasonal uptick in prices of certain food categories such as vegetables, pulses, milk and egg, fish, and meat. Nevertheless, the food and beverage inflation continue to be benign on a YoY basis at 3.29% in May-23 as compared to 7.84% in Apr-23. This has been primarily due to moderate summer conditions in the current year and the steps taken by the government to cool down the market prices of cereals and edible oil. 

Core inflation (excluding inflation in food group and fuel and light group) stood at 5.1% in the month, significantly lower than the 5.3% in Apr-23 and 5.9% in Mar-23. Gradually declining core inflation is a comfort factor to the MPC although the target of the central bank is to align it closer to the base band of 2%-4%.

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 any upside risks while also assessing the impact of the 250 bps rate hike on the economy.”

Table 1: Overview of key sub-components of inflation

Chart 1: Both CPI, WPI inflation has eased considerably since their respective peaks