Overview
India’s CPI and WPI inflation converged in Nov-22 with a print of 5.88% YoY (11-month low) and 5.85% YoY (21-month low) respectively. More importantly:

• Both metrics exhibited sharp deceleration, with headline CPI and WPI inflation easing by 89 bps and 254 bps respectively over the previous month.
• From their respective monthly peaks in FY23, headline CPI and WPI inflation are now lower by 192 bps and 1078 bps respectively.
• Last, but not the least, CPI inflation, after a hiatus of 11-months, printed within the target range (2-6%).

Key highlights of CPI inflation

• On sequential basis, CPI declined by 0.11% MoM in Nov-22, marking its first fall in 10-months.
• Food and Beverages index fell by 0.72% MoM in Nov-22, marking its first decline in last 9-months. The downside was led by Vegetables (-8.3% MoM), Fruits (-2.0% MoM), and Meat & Fish (-0.7% MoM). On the other hand, price pressures were seen to persist in case of Cereals (+1.3% MoM) and Spices (+1.4% MoM).
• Respite on food inflation was driven by perishables, which appear to have benefitted from fresh mandi arrivals post the erratic rainfall in Oct-22. Vegetable inflation has been volatile and in high double digits in the first half of the current fiscal but from Oct-22 onwards, the winter seasonality has kicked in, bring the much needed relief in vegetable prices. Interestingly, fruit inflation has been relatively benign in comparison and reflects the increased investment in horticulture and storage infrastructure apart from higher imports. The animal protein inflation (egg, fish, and meat) has also been largely stable from Sep-22 onwards although egg prices have seen a sharp uptick in Nov-22. However, price pressure in other parts of the food basket, namely cereals and spices continues to persist. In addition, (i) edible oils saw its first price increase after a 5-month hiatus, and (ii) milk prices continue to march ahead at a somewhat elevated pace. We note that the lagged spillover impact of elevated agricultural input prices and extension of PM Garib Kalyan Yojana (until Dec-22) could keep food inflation pressures on the table. However, the arrival of incoming kharif produce and ongoing healthy rabi sowing (up 6.4% as of Dec 2nd) would help to neutralize some of these risks.
• While crude oil prices have been on a downtrend, there has been a modest rise in the fuel and light inflation to 10.6% in Nov-22 from 9.9% in Oct-22 with a sequential uptick of 0.35%. The uptick in sequential momentum was primarily on account of the revision in electricity tariffs, coal, firewood and chips as well as kerosene. It may be noted that inflation in this basket is not directly related to the transportation fuel prices and more linked to the electricity tariffs and LPG/CNG prices used in households.
• While housing inflation continues to be stable at 4.6% YoY, clothing and footwear and miscellaneous category inflation continue to be relatively high at 9.8% YoY and 6.1% YoY respectively in Nov-22. The sequential inflation in both the latter categories continue to be positive throughout the current year, reflecting the transmission of higher food and fuel prices to the other goods and services consumed by households. The steady inflation print of around 6.0% in the miscellaneous category in the current fiscal reflects a broad based increase in the charges for household services, healthcare, transport, communication, recreation, education, and personal care. Clearly, the demand in these segments have seen a significant recovery after the prolonged pandemic and has allowed the pass through of higher operating costs by the service providers.
• Sequential momentum in core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous) moderated slightly to 0.40% MoM in Nov-22 from 0.69% in Oct-22. The annualized rate of inflation under this category continued to be above 6.0% for over a year although it posted a mild moderation to 6.3% in Nov-22 from its post pandemic peak of 6.5% in Oct-22.

Key highlights of WPI inflation

• Sequentially, WPI fell by 0.26% MoM vs. an increase of 0.39% seen in Oct-22.
• Sequential fall was led by consolidated food & beverages index that declined by 1.71% MoM in Nov-22.
• Support also came from core WPI, that saw its third consecutive sequential decline (-0.28% MoM in Nov-22). Significant easing of sequential price pressures was observed in case of textiles, basic metals, paper products, rubber, electronic & optical products, etc.
• In contrast, consolidated fuel index rose by a strong 2.41% MoM, led by jump in price of bitumen, wholesale diesel, pet coke, ATF, naphtha, kerosene, and wholesale petrol.

Outlook
While favorable statistical base effect helped both WPI and CPI inflation drift lower in Nov-22, it is noteworthy that both inflation indices also registered a sequential fall. Importantly, on annualized basis, they continue to underscore disinflationary tendencies, with Nov-22 prints showing a pick-up in the pace of deceleration.

The easing of food inflation while expected, is comforting as it now symbolizes kicking in of favorable winter seasonality (with arrival of kharif produce) at both wholesale and retail levels. Juxtaposed with the ongoing decline in global food prices and pick-up in domestic rabi sowing, one is hopeful of a build-up of relatively benign near-term outlook on food inflation.

Having said so, incipient concerns, primarily in the form of elevated core retail inflation and stickiness in services inflation, continue to persist. We note that core retail inflation has persisted above 6.0% for the last 6 months - a concern that RBI too had highlighted in its recent policy commentary in Dec-22.

However, the silver lining emerges from the sharp deceleration in core wholesale inflation (that printed at a 2-year low of 3.8% in Nov-22). Incremental softness in most commodity prices (including crude oil) bodes well for further easing of input price pressure, which should start getting partially reflected in core retail inflation with a lag.

The quarterly CPI inflation print in the current fiscal suggests a gradual moderation from 7.28% in Q1 to 7.04% in Q2 and going by the data points of Oct-22 and Nov-22, we expect the Q3 print to be between 6.20%-6.30% which is still above the upper band of RBI MPC; our Q4 forecast stands at 5.8%, slightly lower than limit. Taking into consideration the above-mentioned factors, we continue to maintain our FY23 CPI inflation forecast of 6.7%. Although it is early to opine, a mild downside risk to this estimate seems to have emerged post the Nov-22 data.  

RBI MPC has raised the repo rate by 35 bps to take the repo rate to 6.25% in the current month in line with our expectations. The likelihood of a pause hereafter has reduced due to the hawkish tone of the MPC and its stated stance to continue with the “withdrawal of accommodation” mode for now. RBI has particularly voiced its concerns on the sticky core inflation which has held up above 6.0% for more than a year. While MPC will closely look at the upcoming macro data prints before Feb-22 meet, we believe there is still a significant likelihood that there will be another round of a moderate rate hike of 25 bps before any change in the stance to ‘neutral’. 

Table1: Key highlights of CPI inflation

Chart1: Sharp deceleration in core WPI inflation may have a lagged impact on core CPI inflation which still remains high