India’s CPI inflation decelerated sharply to 5.02% YoY in Sep-23 from 6.83% in Aug-23. While a decline in inflation due to a cool down of vegetable prices was widely anticipated, the actual outturn surprised significantly compared to market consensus expectation of 5.4-5.5%. inflation is now comfortably back to the policy target band of 2-6% and is expected to remain within that range for the rest of the fiscal unless there are any sudden macro shocks.  

Key highlights of Sep-23 CPI inflation

Sequentially, CPI fell by 1.13% MoM, sharply in contrast to the series average expansion of 0.44% seen in the month of September. 

• The food basket provided relief for the second consecutive month, with the  food index dropping by 1.82% MoM, led by Vegetables (-15.76% MoM) and Fruits (-1.11% MoM).

o   Tomatoes (with a ~65% MoM fall) dominated the price move in the Vegetable index, as supply caught up rapidly in response to the price spike seen over Jul-Aug 2023.

• The consolidated fuel basket posted a series record fall of 3.06% MoM as the LPG price cut (government reduced LPG price for households by Rs 200 per cylinder towards the end of Aug-23) got captured.
• In an unanticipated development, the housing index fell by 0.11% MoM, with bulk of the decline on account of a decline in rentals.
• Beyond the housing space, most other drivers of core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) remained moderate. Amidst support from a somewhat favorable base, the annualized inflation under this category moderated to 4.7% in Sep-23, the lowest in the post Covid period.

Outlook on inflation

While there is comfort to be drawn from the Sep-23 inflation print, there are also reasons to remain vigilant.

• Food  staples like cereals, pulses, and spices, having a cumulative weight of 14.6% in the CPI, continue to face elevated price pressures due to factors like erratic and deficient monsoon along with global supply disruptions. Moreover, impact of El Nino (esp. in the form of low reservoir levels) could weigh upon the upcoming rabi sowing season.

• International crude oil prices have been under pressure since Aug-23 on account of supply cuts by OPEC+, with the recent geopolitical conflict in Israel further aggravating the risk. Although, the upcoming busy election season could prompt the government (including OMCs) to keep retail fuel prices insulated from any adverse impact, the pass-through at WPI level could be uninhibited – this in turn could result in some second order spillover impact on CPI with a lag,

Notwithstanding these risks, we believe there could be a minor downside risk to our FY24 CPI inflation estimate of 5.6%. Going forward, CPI inflation is expected to remain in the 5.0-5.5% 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). Having said so, it would be prudent to ride out the elevated geopolitical uncertainty in the near term to get a clearer picture on inflation in the second half of the fiscal.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “India CPI inflation has taken a sharp dip to 5.02% in Sep-23 from 6.83% in Aug-23, driven by a sharp decline in vegetable prices. Overall food inflation has subsided rapidly to 6.56% YoY vs 9.94% YoY a month back. Given the concerns on the yield in the upcoming kharif crop and the El Nino phenomenon, however, one needs to be vigilant about food inflation. Prices of pulses are on the rise with an inflation print of 16.38% YoY and 4.13% MoM; cereal inflation continues to be in double digits at 10.95% YoY despite the steps taken by the government to cool down the market prices of wheat and rice. The average CPI inflation for the second quarter of the fiscal stood at 6.42% YoY, a four quarter high given the spike in vegetable inflation in the months of July and August.

It is, however, encouraging to note that core inflation has continued to drop and stood at 4.7% (ex. food and fuel items) in Sep-23 which is in close proximity to the headline target inflation of 4.0%. 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. Nevertheless, the geo-political risks in the background and the upward pressure on oil prices apart from the food output risks will keep the RBI MPC watchful and any reversal of the monetary policy stance is likely to happen only in the next fiscal.”

Table1: Overview – CPI 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 is back in the policy target band