In a positive development for India’s economic landscape, the country’s headline retail inflation rate reached a five-month low of 4.87% in October. This decline can be attributed to a combination of factors, including a favorable base effect and cooling prices of certain commodities. However, it’s worth noting that the surge in onion prices has somewhat tempered the fall in inflation.
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As of September, the Consumer Price Index (CPI) inflation stood at 5.02%. The latest figure of 4.87% aligns closely with economists’ expectations, who had projected a year-on-year price increase of around 4.8% for October.
Inflation Details:
The internals of the October inflation data reveal a balanced picture. Food inflation remained unchanged from September, mainly due to countervailing factors within this category.
Among food items, vegetables saw a notable uptick, with a 3.4% month-on-month increase. This was primarily driven by a significant 15% sequential rise in onion prices. In contrast, other key vegetables, such as potatoes and tomatoes, played a role in supporting disinflationary trends. Potato prices remained stable in October compared to September, while tomato prices saw a 19% month-on-month decrease.
Here’s a breakdown of the October 2023 inflation and its changes compared to September 2023:
| Category | CPI Inflation | Change from Sept 2023 |
|---|---|---|
| CPI | 4.87% | +0.7% |
| Food | 6.61% | +1.1% |
| – Cereals | 10.65% | +0.8% |
| – Meat, fish | 3.27% | +0.0% |
| – Oils, fats | -13.73% | -0.8% |
| – Vegetables | 2.70% | +3.4% |
| – Pulses | 18.79% | +2.5% |
| – Fruits | 9.34% | +0.7% |
| Clothing, footwear | 4.31% | +0.4% |
| Housing | 3.80% | +0.9% |
| Fuel, light | -0.39% | +0.3% |
| Miscellaneous | 4.40% | +0.1% |
Eggs saw a 3.4% month-on-month price increase, while pulses rose by 2.5%, and cereals increased by 0.8%, indicating a persistent price momentum.
On the other hand, edible oils experienced a notable drop, with their index falling by 0.8% month-on-month in October. In summary, food inflation remained relatively stable at 6.61% in October, just slightly down from September’s 6.62%.
Beyond food, other categories exhibited subdued price changes. Housing saw a 0.9% month-on-month rise in October, reversing the 0.1% decline in September. Additionally, the ‘clothing and footwear’ and ‘miscellaneous’ categories recorded sequential increases of 0.4% and 0.1%, respectively.
This balanced scenario contributed to a decrease in core inflation, which excludes food and fuel components, from 4.5% in September to 4.2% in October.
Policy Implications:
While India’s headline retail inflation has dropped below the 5% threshold for the first time since June, expectations suggest an upward trend in November and December due to the unfavorable base effect.
According to Aditi Nayar, Chief Economist at ICRA, CPI inflation is likely to reach 5.6% by December and maintain a range of 4.9-5.6% for the next two quarters. This will be followed by a temporary dampening effect in July-September 2024, owing to a benign base effect.
The Reserve Bank of India (RBI) anticipates CPI inflation to average 5.6% in the current quarter. With the October inflation figure at 4.87%, it would require an average of 6% inflation in November-December to meet the RBI’s forecast. Despite the possibility of undershooting this forecast, it may not lead to an immediate adjustment in monetary policy.
IDFC First Bank’s Gaura Sen Gupta notes that the RBI’s Monetary Policy Committee (MPC) is unlikely to change its stance of ‘withdrawal of accommodation’ as long as CPI inflation remains above the 4% target.
ICRA’s Aditi Nayar concurs, anticipating that the MPC will maintain a hawkish stance and keep the repo rate and policy stance unchanged at its next meeting in December.
Sujan Hajra, Chief Economist at Anand Rathi Shares and Stock Brokers, predicts that inflation will fluctuate between 4% and 5% over the next year, indicating little likelihood of a rate adjustment during this period.