India’s CPI inflation accelerated to 5.55%YoY in Nov-23 from 4.87% in Oct-23, reversing the moderating trend seen over the last three months. On a positive note, the actual print was marginally below expectations with market consensus pegged at 5.7%.

Key highlights of Nov-23 CPI inflation

• On a sequential basis, CPI rose by 0.54%MoM in Nov-23 compared to 0.65% in Oct-23, clocking a higher run-rate than typically seen in the month of November (average at 0.48% MoM). 
• The uptick was predominantly led by Food and beverages, with the sub-index rising by 0.89%MoM in Nov-23 compared to 1.01% in Oct-23. Among the food items, price pressures were led by vegetables (5.0% MoM), eggs (2.8% MoM), pulses (1.6% MoM), sugar (1.2% MoM), and cereals (0.9% MoM). 
  1. Within vegetables, the upside was led by steep rise in price of onions (47.8% MoM) and tomatoes (40.9% MoM), defying the winter seasonality that typically sets in November each year. Price increase in both the commodities can be attributed to supply moderation amidst unseasonal rains coupled with the spurt in festive demand.
  2. In a bid to keep domestic onion prices in check, Government has extended the export ban on onions till Mar-24.
  3. What is worrying, is the 20.2% YoY and 1.6% MoM in pulses inflation in Nov-23 since pulses are a staple diet for a large part of the Indian population. 
  4. Except for animal protein items, there has been a high inflation in all the other food categories. While cereal inflation has continued to be high at 10.3% YoY, fruit inflation has climbed to 10.9% YoY. 
• The consolidated fuel index recorded a modest sequential expansion of 0.06% MoM in Nov-23. On annualised basis, at -0.5%, inflation for the category has been in contraction zone since Sep-23 and has aided to partially offset the pressures seen on food front.
• Core CPI (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) inflation eased to 4.2% YoY in Nov-23, to mark the lowest core inflation level in the post Covid phase. This is a matter of comfort for the MPC as it suggests that the second round effects of the rise in food inflation is yet to emerge in this cycle. 

Key highlights of Nov-23 WPI inflation

• Nov-23 saw WPI inflation move into positive territory on annualised basis, coming in at 0.26%YoY after a hiatus of 7 months compared to -0.52% in Oct-23. 
• Akin to CPI, upside in WPI was led by food prices, which rose by a strong 2.62%MoM in Nov-23 compared to 0.90% in Oct-23, led by vegetable prices (particularly onions and tomatoes)
• Other sub-components of Fuel and Power as well as Manufacturing recorded subdued momentum, in comparison

Inflation Outlook 

The upside risks on food inflation front seem unrelenting, despite the plethora of Government administrative measures already announced. Weather related disruptions as well as global factors have been imparting an upside to select food prices. We expect food price pressures to continue in the coming months, owing to: 

• Downside in Kharif harvest: As per Government’s first advance estimate of kharif crop for 2023-24, sizeable downside is expected in output of Pulses and Oilseeds. For some varieties of pulses, such as Moong and Urad, initial estimates peg a reduction in production to the tune of 19.7% and 18.2% vs. comparable estimates from last year. 
• Weaker Rabi sowing: In recent weeks, area sown under Rabi crops has lost pace, with Wheat and pulses sowing lagging by 1.0% and 8.4% respectively vs. comparable levels from 2022 as of 8th Dec-23. In addition, possibility of El Nino strengthening in early months of 2024, could possibly mean downside to Rabi crops especially wheat. 
• Stickiness in food inflation: Pulses, Cereals, and Spices have recorded double-digit inflation since past 6-months, 15-months, and 18-months respectively. 

As such, food prices remain on close watch, though setting in of winter seasonality esp. with respect to vegetables may offer some comfort in the short term. Having said so, as per high frequency mandi data, vegetable prices have risen by 1.1% in Dec-23 so far (as of 12th Dec) with rise recorded in price of Garlic, Bitter Gourd and Lady finger. With more than half of the month to go, while prices are expected to de-escalate, but whether they will align to historical average decline of 11.9% typically seen in the month of Dec-23 remains to be seen. A supportive government policy may have an important role to play to curb supply side risks. 

Looking beyond food, global commodity prices have remained range bound on account of slowing global growth and almost complete normalisation of supply chains. This is well reflected in WPI inflation averaging at -1.3% on a FYTD basis (Apr-Nov-23). As such, we believe there could be a minor downside to our FY24 CPI inflation estimate of 5.6% if there is no major shocks in the food segment.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “CPI Inflation for Nov-23 has been largely in line with our forecast. Clearly, the prime driver of the pickup in inflation is food prices which rose by 8.7% YoY. Vegetable inflation, as suspected, has again moved up to high double digits due to the resurgence of prices of onions and tomatoes. Except for animal protein items, there has been a high inflation in all the other food categories. Such high food inflation coming right after the kharif season will be a matter of concern for the policymakers. Further, the continuing EL Nino phenomenon, lower reservoir levels along with lower rabi sowing will continue to pose upside risks to food inflation over the next few months and may need significant supply side interventions from the government. 

On the other side, the drop in core inflation to around 4.2% and nearer to the RBI-MPC target of headline inflation is surely a matter of comfort. This suggests that food inflation is yet to push up inflation expectations higher so far. 

We expect inflation to remain in the band of 5.5%-5.7% in Dec-23 which is likely to lead to an average headline inflation of 5.4% in the third quarter, materially less than the 6.4% witnessed in the second quarter. Nevertheless, RBI would remain cautious on the inflation front not only due to the food inflation risks but also on account of higher growth momentum observed so far in the current fiscal. We don’t expect any rate action from RBI over the next six months; however, any dovish stance from Fed and rate cuts from the latter earlier than envisaged can expedite the rate cut decision to some extent.”

Table 1: Overview of key sub-components of inflation 

Chart 1: CPI and WPI inflation both moved up in Nov-23, led by food prices

Chart 2: Select food categories continue to see elevated price pressures