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NOV-21 INFLATION: THE UPWARD ASCENT

15 Dec 2021

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KEY TAKEAWAYS

  • Nov-21 saw both inflation metrics i.e., on retail and wholesale price accelerate. While CPI partly surprised on the downside vis-à-vis market expectations, WPI inflation soared to yet another record high.
  • The ongoing comfort on headline CPI inflation is proving to be transient, with passthrough from WPI to CPI inflation likely to keep core CPI elevated, already northward of 6.0% over Oct-Nov-21. 
  • On CPI inflation outlook, food inflation is expected to provide comfort owing to expectation of a healthy Kharif output, significant traction of acreage under Rabi crops along with policy interventions in case of edible oils and pulses. Typical winter seasonality has also kicked in for vegetable prices in Dec-21, so far.
  • However, upward price pressures from strengthening demand, the latest hike in telecom tariffs that is yet to be reflected in the headline print and impact of GST rate hike on select clothing and footwear items due in Jan-22, along with Omicron related possible supply disruptions remain on watch. 
  • For FY22, we continue to expect average CPI inflation to print at 5.5% with material upside risks that are higher than the RBI’s forecast of 5.3% though moderately lower vis-à-vis the 7-year high level of 6.2% in FY21.

Nov-21 saw both inflation metrics i.e., on retail and wholesale price accelerate. While CPI surprised slightly on the downside vis-à-vis market expectations, WPI inflation soared to yet another record high. The comfort on headline CPI inflation is proving to be transient, with passthrough from WPI to CPI inflation likely to keep core CPI elevated, already northward of 6.0% over Oct-Nov-21. 

CPI inflation: Key highlights

India’s CPI inflation rose to 4.91%YoY in Nov-21 from 4.48% in Oct-21; coming in below market expectations in the range of 5.0-5.10%. After bottoming out in Sep-21 at 4.35%, this marks the second consecutive month of upside.

Despite a reduction in sequential prices pressures versus previous month, the upside in headline print underlined the unfavorable base at play. To put this in perspective, incrementally CPI index rose by 0.73% MoM in Nov-21 i.e., nearly half the pace of 1.41% seen in Oct-21. 

Key highlights: CPI Inflation

  • Providing respite, fuel prices’ index contracted by 18 bps sequentially to record its first contraction in 15 months. This was driven by moderation in price of electricity (-3.2%MoM) along with Diesel, Charcoal and Dung Cake; which more than offset the strong uptick in low-weighted Kerosene prices (13.49% MoM). As such, fuel inflation eased from Oct-21’s record high of 14.35%YoY to 13.35% in Nov-21.
  • In similar vein, fuel items in the miscellaneous index (i.e., Petrol and Diesel) registered a sizeable decline in momentum, reflecting a more direct impact of the cut effected in excise tax and VAT by the government in Nov-21. This led to a sequential contraction in ‘Transport and Communication’ sub-category within Miscellaneous by 58 bps. 
  • Food prices retained their elevated momentum at 1.19% MoM, though lower vs. 2.26% in Oct-21. Upside pressures were led by vegetables prices (+7.45%MoM), which reeled under the impact of unseasonal rains along with Eggs (1.05%MoM) and index heavy weight Cereals (0.54%). However, capping the upside, edible oils recorded a contraction (-0.26% MoM) along with Meat & fish (-1.47%MoM) prices, to provide succor. Annualized food inflation rose marginally to 2.60% from 1.82% in Oct-21. 
  • Among other movers, category of clothing and footwear posted a strong momentum of 0.91% MoM, underscoring the ability of producers to charge higher price for goods amidst the ramp-up in festive demand.
Core inflation (i.e., CPI ex Food & Beverages and Fuel & Light indices) increased by 0.37% MoM in Nov-21 vs. 0.69% MoM in Oct-21. Despite the moderation in sequential momentum, annualised core inflation rose a tad to remain above the 6.0% handle for the second consecutive month (see Table 1). 

  WPI inflation
  • WPI inflation soared to a record high of 14.23% YoY (considering base year 2011-12) in Nov-21 from 12.54% in Oct-21. Sequentially prices rose by a strong 2.73% to mark the fastest pace of monthly increase on the series. 
  • Price pressures were led by categories of food (driven by vegetables and eggs) and fuel incrementally in the month of Nov-21.
  • Despite a marginal downside in India Crude Basket in the month of Nov-21 (by 1.8%MoM in USD terms), delayed pass-through of past increase in crude oil saw price pressures across the fuel sub-components. This was led by Bitumen (+18.2% MoM), Kerosene (+13.8% MoM), LPG (+13.0% MoM), Petrol (+11.8% MoM) among others.
  • Core WPI inflation (non-food manufacturing) continued its uptrend coming  at 12.3% YoY in Nov-21 from 11.9% in Oct-21. Resumption in economic activities along with elevated raw material prices has been weighing on manufactured product prices. This was also reflected in the latest PMI manufacturing release which stated that input cost had risen to a near eight-year high amidst increase in global commodity prices. Going forward, with improving demand scenario, persistent raw material shortages along with high commodity prices and narrower profit margins, we expect a further pass-through of input cost to consumers thereby gradually feeding into India’s core retail inflation.
   Outlook

On CPI inflation outlook, food inflation is expected to remain the biggest source of comfort. Expectation of a healthy Kharif output, significant traction of acreage under Rabi crops along with policy interventions in case of edible oils and pulses should continue to provide relief. The typical winter seasonality is also gathering pace as seen in vegetable prices, down 4.0% sequentially so far in Dec-21 (up to 13th Dec-21). Further, the second order impact of reduction in duties on petrol and diesel along with Omicron concern led correction in global commodity prices, should provide additional comfort.

Having said so, several ‘known-knowns’ and ‘known-unknowns’ inflationary risks remain on the anvil. 
  • The impact of upward adjustment in telecom tariffs in Dec-21 along with GST rate hike on select clothing and footwear items (effective Jan-22) is yet to get reflected.
  • Continued progress on vaccinations, recovery in personal mobility along with a combination of pent-up/revenge demand could keep core inflation elevated. 
  • Several sectors such as autos, electronics, textiles among others are seeing pass-through of higher inputs costs in a calibrated manner, which could continue into 2022 along with still persistent supply disruptions.
  • The spread of Omicron runs the risk of re-imposition of state-level restrictions. Though the impact of successive lockdowns on economic activity is expected to be milder, it could nevertheless induce short term supply disruptions and in turn fuel inflationary pressures. 
From perspective of CPI trajectory, we expect subsequent inflation readings to trend higher amidst the waning of a favorable base. Beginning Dec-21, CPI inflation could remain in the 5.5-6.0% band until the end of the fiscal year. Overall, we continue to maintain our FY22 CPI inflation forecast at 5.5% with material upside risks (from factors outlined above).

From monetary policy perspective, inflation data continues to pose a challenge for RBI. Average inflation on an annual basis is on course to remain above RBI’s midpoint of inflation band for the third year in a row in FY22. In its own assessment, RBI estimates Q3 and Q4 FY22 CPI inflation at 5.1% and 5.7% respectively, such that full year average stands at 5.3%. Despite visible upside risks to these estimates, RBI’s policy tolerance for above target inflation is likely to ensure that the accommodative stance along with a status quo on repo rate at 4.0% remain in place in the near term. While the calibration of the surplus system liquidity will continue till the next policy meeting, it is difficult to comment on the timing of the reverse repo rate hike. There may be a possibility of such an increase in Feb-22 provided the high frequent economic indicators continue to remain robust and the recent discovery of a new Covid variant "Omicron’ doesn’t start building up another pandemic wave in the country. Continuing uncertainty on the residual risks of the pandemic can reinforce the ‘wait and watch’ approach of RBI, thereby slowing down the progress on the policy normalization path. 

Annexure

Table1: Key highlights of CPI inflation 

Chart 1: Both WPI and CPI prices accelerate in Nov-21

Chart 2: Pass-through of higher input price to gradually feed in into Core CPI