Core inflation at a 43-month low, but RBI’s concerns over repeated food price shocks seem valid.
India’s retail inflation based on the Consumer Price Index (CPI) fell to a four-month low of 4.87% in October from 5.02% in September, mainly due to the statistical effect of a high base, data released by the National Statistical Office showed on Monday. In October 2022, CPI inflation was 6.77%.
Food inflation, based on CFPI, came in at 6.61% in October as compared to 6.62% in the previous month. But this was also on account of a high-base effect which depressed year-on-year inflation rates in October from the levels seen in September, as sequentially indices of all the major food items barring ‘oils and fats’ rose.
Core inflation, which reflects underlying price pressures and excludes volatile components of food and fuel, crashed to a 43-month low of 4.2% during the month. In October last year, core inflation was 6%.
October marks the fourth consecutive month of core inflation staying below 5%, and the eighth straight month for it to be recorded below 6%. “The moderation in core inflation indicates that generalisation of price pressures has not taken place. Hence, the Reserve Bank of India is expected to remain on prolonged pause in FY24 and possibly even till mid-FY25,” said Gaura Sen Gupta, economist, IDFC FIRST Bank.
On a month-on-month basis, the overall CPI index increased 0.7% – a reversal in trend observed after two consecutive months of contraction. The Consumer Food Price Index (CFPI), which constitutes 39% of the CPI, rose 1.1% on month in October.
The inflation rates of ‘cereals and products’ eased to 10.65% in October from 10.95% a month ago, and that of ‘vegetables’ to 2.70% from 3.39%. ‘Pulses and products’ inflation, however, rose to 18.79% in October from 16.38% in September, while ‘milk and products’ inflation ebbed to 6.44% from 6.89%. These four groups account for about 25% of the CPI.
The inflation of ‘oils and fats’ was (-)13.73% in October as against (-)14.04% in September. The group carries 3.6% weight in the CPI basket.
“Around 26% of the CPI witnessed high inflation in the food basket. The highest was for spices, pulses and cereals where it was in double digits. Eggs, fruits were other contributors to inflation,” said Madan Sabnavis, chief economist, Bank of Baroda. “Edible oils provided a major decline to the inflation number at 13.7%. If this component is excluded, CPI would be as high as 5.6%,” he said.
Vegetables index in October rose 3.4% on month, as compared to a fall of 15.8% in September. This was due to a sharp rise in onion prices. The inflation of onion came in at 35.88% in October as compared to 23.29% the previous month. As onion prices began rising from the third week of October, the full impact of the price rise will be reflected in the November CPI print.
In October, the RBI’s Monetary Policy Committee had observed that the unprecedented food price shocks are impinging on the evolving trajectory of inflation and that recurring incidence of such overlapping shocks can impart generalisation and persistence.
‘Fuel and light’ remained deflationary for the second consecutive month in October at (-)0.39%. The deflationary print is largely due to the cut in LPG prices that took place during the end of August. Also, the ongoing war in Israel-Gaza has not yet led to a massive spike in global crude oil prices, which otherwise, would’ve raised the risk of hike in retail pump prices.
Rajani Sinha, chief economist, CareEdge said, “we expect CPI inflation to remain range-bound around 5.3-5.4% in the next two quarters. However, with risks tilted to the upside, the central bank (RBI) is expected to remain vigilant and maintain its hawkish policy tone in the upcoming policy meeting.”
The RBI has projected CPI inflation to average 5.4% in FY24, with Q3 and Q4 at 5.6% and 5.2%, respectively.