In line with consensus expectation of approximately 4.8%, India’s CPI inflation moderated to a 4-month low of 4.87% YoY in Oct-23 from 5.02% in Sep-23. 

Key highlights of Oct-23 CPI inflation

While the headline inflation has seen a drop of 15 bps, sequentially, CPI has risen by 0.65% MoM vs. a fall of 1.13% MoM in Sep-23. 

• The food & beverages basket spearheaded the sequential increase, posting a 0.95% MoM jump. This was on account of Vegetables (+3.38% MoM), Eggs (+3.38% MoM), Pulses (2.54% MoM), Sugar (+1.10% MoM), Spices (1.03% MoM), and Cereals (+0.77% MoM). 
  1. Within the vegetables index, continued slide in tomato price was offset by a sharp jump in onion prices. 
• The consolidated fuel basket posted an increase of 0.23% MoM on account of upward adjustment in price of kerosene, reflecting the lagged pass-through of firming up of prices of crude oil.
• Core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) rose by 0.4% MoM sequentially, the highest in 5-months. This was predominantly on account of a sharp jump in the housing index (0.85% MoM in Oct-23), even as other components maintained a modest price momentum. Amidst support from a somewhat favorable base, the annualized core inflation eased to 4.5% in Oct-23, creating a new post Covid low (pre COVID low in the series was recorded at 3.7% in Dec-19) which is a matter of comfort for the regulators. 

Key highlights of Oct-23 WPI inflation

• India’s wholesale inflation (WPI) continues to amble in the periphery of deflation, reporting a figure of -0.52% YoY in Oct-23 as against -0.26% YoY in Sep-23. This is the seventh consecutive month since Apr-23 that WPI has been in a deflationary mode on a higher base of the previous year which was driven by a peak in crude oil and other commodity prices. However, the sequential inflation of WPI stood at 0.40%, reflecting renewed pressure in some commodity and mineral prices. Wholesale food inflation stood at 1.33% MoM and carry upside risks, given the continuing inflation in cereals, pulses and onions. 
• What has also helped to keep WPI inflation in negative territory is the decline in LPG prices due to higher subsidies which has led to fuel and power inflation to decline to -4.03% YoY in Oct-23. Deflation continues to also remain in manufactured products at 1.13% YoY, reflecting the lack of strong demand. The moderation in crude oil prices have also contributed to less pressures on WPI inflation. 
• We expect WPI inflation to be in positive territory over the next few months, given healthy industrial and consumer demand amidst the backdrop of steady food inflation. This is set to hold CPI inflation in the range of 5.0%-5.6% over the next two quarters. 

Inflation Outlook

• With Oct-23 print, headline CPI inflation is back to its levels that existed before the onset of sharp escalation in price of tomatoes in between Jun-Aug 2023, which now stands normalized. While that’s comforting and vindicates the belief that such supply disruption in food items is transient in nature and does not require monetary policy intervention, we believe reasons for remaining vigilant continue to persist.
• Food staples like cereals, pulses, and spices, having a cumulative weight of 14.6% in the CPI, continue to face persistent and elevated price pressures due to factors like erratic and deficient monsoon as well as global supply disruptions. Annualized inflation in case of pulses, cereals, and spices is in double-digits for past 5-months, 14-months, and 17-months respectively.
• As per the government’s first advance estimates of kharif crop for 2023-24, sizeable downside is expected in the production of pulses (-19.7%) and oilseeds (-18.2%). 
• After inching up over the last 5-months (i.e., Jun-Oct 2023 by a cumulative ~84%) in accordance with seasonal trend, onion prices have surged by ~57% so far in the month of Nov-23 amidst supply shortages as per daily mandi price data. 

Having said so, there are few comforting developments on the margin that would dampen the upward price pressures to extent:

• Last month, the Government had imposed a Minimum Export Price (MEP) of USD 800/tonne on onions, effective until 31st Dec-23 in a bid to limit exports, improve domestic supplies and rein in price pressures. We note that onion prices are showing signs of a peak and are likely to start correcting in the coming weeks with a catch-up in supply. 
• The ~7.0% hike announced in MSP for wheat is the highest in the last decade. This should incentivize higher rabi sowing of wheat and could aid government procurement towards replenishment of its stocks.
• Although the Israel-Hamas war continues to simmer, as of now there is no sign of wider escalation. As such, international crude oil prices have corrected from USD 93 pb levels in Sep-23 to USD 83 pb levels in Nov-23 so far. This reduces the second order spillover risk to core inflation, which is currently undershooting its long period average of ~5%.
• On net basis, we continue to believe that there could be a minor downside risk to our FY24 CPI inflation estimate of 5.6%. Having said so, it would be prudent to ride out the elevated geopolitical uncertainty in the near term to get a clear picture. Going forward, CPI inflation is expected to remain in the 5.1-5.6% range over Q3-Q4 FY24, providing comfort to the MPC to maintain its pause in the remaining two policy reviews in FY24 (i.e., in Dec-23 and Feb-24).  

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “India’s headline retail inflation expectedly has taken a further dip to 4.87% in Oct-23 from 5.02% in Aug-23. However, overall price pressures remain with a sequential rise of 0.65% in the CPI and 1.06% in the food category. On an annualized basis, food inflation still continues to be almost at the same level at 6.6%YoY as compared to the Sep-23 print. Vegetable prices have increased sequentially by 3.38% primarily due to a spurt in onion prices seen over the last month. Pulses inflation stood higher at 18.79% YoY with a further sequential rise of 2.54%. Cereal inflation also continues to be in double digits at 10.65% YoY despite the steps taken by the government to cool down the market prices of wheat and rice. Given the concerns on the yield in the upcoming kharif crop and the El Nino phenomenon, the upside risks to food inflation remain. 

We expect the headline inflation to average 5.6% in FY24 and remain in the band of 5.0%-5.5% in the second half of the fiscal. While that will be largely in line with RBI projections, we believe that the geo-political risks in the background and the food output risks will keep the RBI MPC watchful and any reversal of the monetary policy stance is unlikely to happen before Q2FY24.”

Table1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI

Chart 1: CPI inflation within in the policy target band for now

Chart 2: Onion prices risen sharply in last 3-4 weeks, poses near-term risks

Chart 3: Easing of crude oil price reduced the second order spillover risks to inflation