Inflation may be slower but keep an eye on food prices

The dip factors to the start of an prolonged moderation over the subsequent six months on account of a beneficial base impact that’s set to accentuate over this period. The headline CPI inflation bottomed out at 4.3% in September 2021 and steadily rose to six.0% by January and additional to an eye-watering 7.8% by April. On the present juncture, we count on a broadly vital moderation in inflation to round 5% by April 2023. Nevertheless, the extent of this moderation is more likely to be impacted by a number of components, together with actions in international commodity costs, potential provide disruptions in perishables and a sturdy demand for providers.

The anticipated base effect-led cooling in CPI inflation is anticipated to be pushed largely by the meals and drinks phase, the place inflation surged manifold, from 1.6% in September 2021 to eight.1% in April. Whereas traits within the estimated kharif output are blended throughout crops, the rabi or winter sowing season has began on a wholesome observe, aided by wholesome reservoir ranges, which augurs nicely for the prospects for output and costs. However, the costs of perishable objects, notably greens, could stay agency within the rapid time period amid rainfall-related disruptions, one thing that will weigh upon the minds of customers. Nevertheless, a excessive base is more likely to restrict a hardening within the YoY inflation for greens within the remaining months of FY2023.

Moreover, there are issues round double-digit YoY inflation prints within the cereals sub-group, which has a substantial weight of almost 10% within the CPI basket. Wheat/atta (personal distribution system) costs rose by 15.5% between December 2021 and October 2022, following the decline in final 12 months’s rabi output for wheat, owing to the heatwave between March and Might. This pushed up the YoY inflation price within the merchandise to a sequence excessive of 17.6% in October. Significant reduction is probably going solely after there are indicators that the subsequent crop goes to be ample. Likewise, the 6.1% YoY contraction within the rice output estimated for this 12 months’s kharif season, has pushed up the YoY inflation within the meals merchandise (non-PDS rice) to double digits in October 2022.

Regardless of the elevated inflation prints within the cereals sub-group, the extension of the free foodgrain scheme (Pradhan Mantri Garib Kalyan Anna Yojana) until December 31 is more likely to have offered a cushion to low-income households. Nevertheless, the excellent wheat shares of twenty-two.7 million metric tonnes (MT) in October is the bottom October degree since 2016 and solely modestly increased than the requisite buffer norms. Whereas the rabi sowing season for wheat is underway, the output might be obtainable solely after March 2023. That is more likely to constrain an extra extension of the free foodgrain scheme past end-December, after which elevated inflation ranges within the cereals subgroup would possibly begin hurting low-income households. Furthermore, if this scheme ends in December, then there could also be some upward strain on market costs within the subsequent quarter.

Along with meals objects, a pick-up in inflation within the providers phase, which accounts for 23.4% of CPI, poses a priority. The YoY inflation on this phase has been rising steadily since June and stood at 5.6% in October, the best since February 2019. The prevailing sturdy demand for providers domestically poses dangers, given its vital share within the CPI basket, and therefore, stays a key monitorable, in our view.

With CPI inflation remaining above MPC’s 6% tolerance degree in October for the tenth consecutive month, we consider one other price hike is definite within the December coverage overview assembly. Nevertheless, given the moderation in CPI inflation in October and our expectations of an extra dip to round 6.0-6.2% in November, we anticipate the dimensions of the hike to be restricted to 35 foundation factors (bps), decrease than the 50 bps seen within the final three critiques. The power of the expansion in Indian Gross Home Product in Q2 FY2023, the info for which might be launched on the finish of this month, might additionally affect the dimensions of the repo hike within the upcoming assembly.

Aditi Nayar is chief economist, ICRA Restricted

The views expressed are private