KEY TAKEAWAYS - India retail and wholesale inflation showed a divergent trend in Sep-22. While CPI inflation inched up to a 5-month high of 7.41% YoY (from 7.00% in Aug-22), WPI inflation eased to an 18-month low of 10.70% YoY (from 12.41% in Aug-22).
- On annualized basis, the increase in CPI inflation was led by food & beverages, while the deceleration in WPI inflation was broad based involving fuel and manufactured goods.
- The ongoing disinflation in most international commodity prices is getting captured by WPI inflation – if the current trend persists, then WPI inflation could briefly touch negative territory in Q1 FY24.
- The makes us hopeful of expecting a decelerating trend in CPI inflation in H2 FY23 and beyond with support from gradual easing of global supply chain disruptions, a normal monsoon outturn, and imposition of price and quantity control measures by the government for select food items.
- However, depreciation in rupee, lower acreage in case of paddy and pulses, erratic rainfall in Sep-Oct’22, further extension of PMGKY, and a complete reflection of changes in electricity prices could impart upside risks to inflation levels.
- Overall, we believe risks surrounding our FY23 CPI inflation forecast of 6.7% to be neutral.
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India’s retail and wholesale inflation showed a
divergent trend in Sep-22. While CPI inflation inched up to a 5-month high of
7.41% YoY (from 7.00% in Aug-22), WPI inflation eased to an 18-month low of
10.70% YoY (from 12.41% in Aug-22). Notwithstanding the substantial drop of 593
bps in WPI inflation since its peak in May-22, CPI inflation has averaged close
to 7% mark in the last 8-months. More importantly, since it has stayed well above
the policy threshold of 6% for three consecutive quarters now, the inflation
targeting mandate would for the first time trigger a formal explanation (along
with steps for course correction) from the central bank to the central
government.
Key highlights of CPI inflation
- On sequential
basis, CPI momentum firmed up in Sep-22 to 0.57% MoM, up from 0.52% in Aug-22
and 0.18% in Sep-21.
- Momentum of Food and Beverages rose to 0.85% MoM in Sep-22 from 0.74% in Aug-22 and
0.06% in Sep-21. The upside was led by persistence of sequential price
pressures in case of Vegetables (+2.62% MoM), Cereals (+2.00% MoM), Spices
(+1.91% MoM), and Milk (+0.95% MoM), all of which saw a similar increase in the
previous month. In addition, fresh build-up of price pressures was seen in case
of Meat & Fish (+1.31% MoM) and Pulses (1.14% MoM).
- The near broad based nature of sequential price pressures in case of food
reflects the impact of (i) lingering of wheat inflation due to a combination of
a severe heat wave at the end of FY22/start of FY23 and global disruptions on
account of Russia-Ukraine war, (ii) lower sowing and lower output in case of
paddy and pulses in the current kharif season, (iii) 3-month extension of PM
Garib Kalyan Yojana (central government’s free foodgrain scheme), and (iv)
spillover impact of elevated agri input prices.
- Consolidated fuel prices rose by a moderate 0.29% MoM, with bulk of the increase
coming from 1.61% monthly increase in electricity prices even as retail prices
for LPG, petrol, and diesel remained unchanged.·
- The
silver lining in the inflation print came from sequential momentum in core
inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol
and diesel items within Miscellaneous) easing to a 15-month low of 0.29% MoM in
Sep-22 from 0.52% in Aug-22. Nevertheless, the annualized rate of core inflation
continued to remain steady at 6.2% levels, similar to its last 3-months
average.
Key highlights of WPI inflation
- On sequential basis, WPI posted its third consecutive monthly contraction,
with Sep-22 registering a print of -0.65% MoM vs. -0.58% in Aug-22.
- The consolidated
food & beverages index saw a sequential fall in momentum, with a print of
-0.46% MoM in Sep-22 vs. 1.04% in Aug-22. At a granular level, while cereals
and vegetables saw buildup of price pressure, the same got offset by decline in
price for fruits and manufactured food items (likely on the back of recent
moderation in price of edible oils).
- The consolidated
fuel & power index saw its third consecutive monthly fall with a print of
-0.83% MoM in Sep-22 vs. -5.76% in Aug-22. At a granular level, the fall was
led by decline in prices of Crude Petroleum & Natural Gas, Pet Coke, Naphtha,
LPG, Kerosene, Furnace Oil, ATF, etc.·
- Core
inflation (headline WPI excluding food & beverages and all forms of fuel
items) eased to a 19-month low of 6.77% YoY in Sep-22 from 8.09% in Aug-22 on
the back of drop in sequential momentum to -0.63% MoM vs. 0.14% in Aug-22. The
decline was led by drop in prices of Non-food Articles and Minerals within
Primary Articles, and Basic Metals and Textiles within Manufacturing Items.
Outlook
The ongoing disinflation in most international
commodity prices is getting captured by WPI inflation – if the current trend
persists, then WPI inflation could briefly touch negative territory in Q1 FY24.
This makes us hopeful of expecting a decelerating
trend in CPI inflation in H2 FY23 and beyond although the process is likely to
be gradual. We also take comfort from the following factors:
- The New
York Fed’s Global Supply Chain Pressure Index (GSCPI) moderated for the fifth consecutive
month in Sep-22 to move closer to normal Levels vis-à-vis its history.·
-
At a
headline level, southwest monsoon ended the season with a 6% surplus rainfall
vis-à-vis the long period average. Barring lower acreages in paddy and pulses,
this should be broadly supportive of food inflation.
- Government administrative
measures including the recent ban on exports of broken rice and imposition of
20% tax on export of non-basmati rice should help curb price pressures on the
margin.
However, there are also risk
factors that need a close watch:
- Erratic rainfall
in the month of Sep-Oct’22 so far poses some challenges for arrival of early
kharif produce. In addition, the extension of PMGKY (government’s free
foodgrain program for the rural poor) by another 3-months until Dec-22 could
provide ancillary pressure on foodgrain inflation.
- Rupee weakness would increase the burden of imported inflation
- Impact of hike in GST
rates on some items of mass consumption along with hike in electricity tariffs
by state discoms is yet to be fully captured.
Overall, we believe risks surrounding our FY23 CPI
inflation forecast of 6.7% are evenly balanced.
Annexure
Table 1: Key highlights of CPI inflation
Chart 1: Sharp deceleration in WPI inflation bodes well for CPI
inflation
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