Core inflation may average 6.2-6.3% in FY23 despite CPI fall in November, say experts

Core inflation, a key parameter in the measurement of price changes, is likely to remain elevated and may average 6.2-6.3 percent at the end of this financial year on account of the lag effect of higher input costs, experts said.

In November too, while the headline retail inflation declined to an 11-month low of 5.88 percent from 6.77 percent in the previous month, core inflation continued to remain high at over 6 percent.

The Reserve Bank of India closely tracks core inflation, which excludes changes in food and energy prices, for policy formulation. At the December 5-7 policy meeting, RBI governor Shaktikanta Das stressed that the main risk is that core inflation remains “sticky and elevated.”

Last week, the monetary policy committee (MPC) hiked the key repo rate by 35 basis points (bps) to 6.25 percent to fight inflation. One bps is one-hundredth of a percentage point. The RBI has increased the repo rate, or short-term lending rate, by 225 bps since May.

“We expect core inflation to average around 6.2 percent in FY23. Headline inflation is expected to remain above the RBI’s upper band of 6 percent until February 2023 and moderate to 4.8 percent (average) in Q1 of FY24,” said Swati Arora, senior economist at HDFC Bank.

The central bank expects headline inflation to ease through the rest of this financial year and in the first quarter of the next financial year, although above the target.

The medium-term inflation outlook is exposed to heightened uncertainties from geopolitical tensions, financial market volatility and the rising incidence of weather-related disruptions, Das said.

Why core inflation matters

The key components of core inflation include education, housing, household goods and services, and personal care. Experts said core inflation gives an accurate picture of price trends in an economy.

At a broader level, inflation has been a major headache for Indian policymakers because high prices have hurt rural households. When prices of goods and services increase, the purchasing power of consumers takes a hit.

Kotak Mahindra Bank's senior economist Upasna Bharadwaj said inflation is likely to ease aided by a favourable base effect and other factors including improving production and easing commodity prices.

Yuvika Singhal, an economist at QuantEco Research, said the outlook on food inflation with the onset of winter, the kharif harvest and healthy traction in rabi sowing is comforting, as is fuel inflation as global crude oil prices slip below $80 per barrel.

“This could offset some build-up/persistence of price pressures in core inflation, especially services inflation, which surpassed the 5.0 percent mark over the months of September-October 2022 for the first time since FY19,” Singhal said.

More rate hikes?

Experts said there is room for the central bank to increase rates further, possibly in February 2023, in a bid to tame inflation. Singhal expects the RBI to make haste slowly and opt for a 25 bps hike in February and consider a pause thereafter.

“We believe that the space for additional tightening could be limited on resurfacing of growth risks and likelihood of strong disinflationary trend in non-core inflation, especially in FY24,” she said.