India’s CPI inflation rose further in Oct-24 to a 14-month high, of 6.21%YoY from 5.49% in Sep-24. While market participants were expecting a further run-up in headline inflation in Oct-24 vis-à-vis Sep-24 with consensus expectation pegged at ~5.8%, the actual outturn was even higher.

Key highlights of Oct-24 data

• On a sequential basis, the CPI index rose by 1.32% MoM in Oct-24. This was significantly higher than the median sequential increase of 0.68% typically seen in the CPI index in the month of October 
• Annualized food & beverages inflation rose further to a 15-month high of 9.69% in Oct-24 from 8.36% in Sep-24. This increase was on account of an adverse statistical base as well as a strong sequential build-up of price pressures. 
  1. Sequentially, CPI Food & Beverages index rose sizeably by 2.25% in Oct-24, in a somewhat broad-based increase.  Price pressures were led by sub-categories of Vegetables (8.19 %MoM), Edible oils (6.02 %MoM), along with Cereals (0.93%). 
  2. Vegetable prices increased considerably due to the increased prices of Tomatoes. Tomato prices surged 161.3% in the month of October, as Karnataka, Andhra Pradesh, and Maharashtra, major tomato-producing states, saw heavy rains which damaged the crops as well as disrupted the supply chains. 
  3. The jump in edible oils reflects the near complete pass-through of the 20% hike in custom duties announced by the government in mid-Sep-24.  
  4. Pulses and Spices also saw a lesser rate of inflation than the month before, posting 7.4%YoY and -7.0%YoY, respectively. Both categories have broadly been on a declining trend for the current calendar year. 
• Consolidated fuel inflation remained in negative territory for the fourteenth consecutive month, coming in at -1.7% YoY from -1.5% in Sep-24. 
• Core CPI inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) rose to an 11-month high of 4.0% in Oct-24 from 3.8% in Sep-24. The annualized increase was led by Household goods & services, Transport & Communication, Education and most importantly, Personal care & effects (which captured the impact of the higher international prices of gold and silver items).
• Excluding precious metals, the adjusted core inflation was unchanged at 3.3% YoY in Oct-24. 

Outlook

The back-to-back two months of inflation upside over Sep-24 and Oct-24 has been unnerving and surely will be a matter of discomfort to the policymakers. Despite an above-normal Southwest monsoon rainfall, food price pressures continued to hold up well up to the end of Oct-24. This could be attributed to excessive rains in some parts of the country in Sep-24, a delayed start to the Kharif harvest in Oct-24 and an overhang of a lower supply of select vegetables from the last cropping season.

Having said that, early signs of price correction are now visible in Nov-24. Vegetable prices, led by Tomatoes, have begun to moderate. Tomato prices are down by 33% since their recent peak in the third week of Oct-24. Further, potato prices too have begun to show signs of reversal, while onion prices have plateaued after the recent increase. In addition, Kharif production (which, as per the Government’s first advance estimate, is projected to be higher than last year for most foodgrains) becoming available in the market is expected to moderate foodgrain prices. Looking ahead, the possibility of a good rabi sowing (amidst healthy reservoir level, high soil moisture, and above-normal rains predicted for the Oct-Dec-24 period) should help to douse food price pressures materially over the next 2-3 quarters.

Meanwhile, fuel price inflation continues to remain largely benign amidst range-bound crude oil price movement. However, the waning of a favourable base, along with the recent depreciation in the rupee, could potentially push the inflation metric marginally into positive by the end of FY25.

Core inflation, too, could continue to inch gradually upwards towards 4.5% levels on the back of past increases in telecom tariffs and elevated prices of precious metals. However, the slowdown in domestic growth momentum, as well as the likelihood of heightened global economic uncertainty (with Trump returning to power), could keep a lid on the upside.  

Implications for monetary policy

The spike in recent inflation prints prompts us to revise our FY25 CPI inflation forecast upwards to 4.8% from 4.5% earlier. Having said that, as outlined above, we do expect food prices to moderate in the coming months as the Kharif harvest comes on board and the winter season offers support.

From a monetary policy perspective, RBI would want to assess the magnitude of anticipated disinflation in food prices over the course of the next 2-3 months. A downside in line with expectations will enable RBI to deliver its first rate reduction of 25 bps, possibly in Feb-25.

Says Suman Chowdhury, Executive Director and Chief Economist, Acuité Ratings & Research, “Oct-24 retail inflation edged up sharply to 6.21% YoY from 5.49% in Sep-24 beyond the consensus estimates in the market. This is the first time since Aug-23 that the figure has breached the RBI MPC tolerance upper band of 6.0%. While the fading of the favourable base factor has contributed to the surge, continuing high prices of vegetables have been a key factor in the high figure.

Vegetable inflation spiked to 42.2% from 36.0% last month, with tomatoes playing a major role. Tomato prices have soared due to heavy rains in Sep-Oct damaging crops in key producing states like Karnataka, Andhra Pradesh. On the food inflation front, additional pressure persists from edible oils and pulses. Price pressures increased from 2.47% YoY in Sept to 9.51% in October in the oil and fats category.  The government raised import duties on crude soybean, palm, and sunflower oils from 5.5% to 27.5% and on refined edible oils from 13.7% to 35.7% in September, contributing to the recent price surge.

Beyond food inflation, core inflation has witnessed a rise which can raise some concerns among policymakers.

We anticipate some relief in the overall food inflation once the kharif crop arrives in the market in late Nov-Dec. Nevertheless, there is an upside risk to the RBI CPI forecast for Q3FY25 that is pegged at 4.8% by RBI-MPC. Given the current inflation scenario and the likelihood of a limited moderation in food inflation in Nov-24, we don’t expect RBI to take any action on interest rates in Dec-24. Further, the chances of a rate cut in Feb-25 has also become a bit uncertain given the global scenario and the new administration in US and will hinge on a steady decline in food inflation over the next few months.”

Table 1: 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, Consolidated Fuel indices and Petrol & Diesel indices from Headline CPI

Table 2: First adv. estimate for Kharif peg increase in production for most key crops

Source: Ministry of Agriculture

Chart 1: Tomato prices corrected by nearly 30% compared to recent peak in Oct-24