CPI inflation declines to a 3-month low of 6.77% in October

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India's headline retail inflation rate fell to a three-month low of 6.77 percent in October from 7.41 percent in the previous months on a favourable base effect, data released on November 14 by the ministry of statistics and programme implementation showed.

At 6.77 percent, the latest Consumer Price Index (CPI) inflation print is broadly along expected lines. As per a Moneycontrol poll, inflation was seen falling to 6.7 percent.

The Reserve Bank of India (RBI), too, expected inflation to fall. Speaking at an event on November 13, Governor Shaktikanta Das said the central bank saw CPI inflation falling below 7 percent in October.

Despite the sizeable fall in inflation in October, it has now spent 10 consecutive months above the 6 percent upper bound of the RBI's 2-6 percent tolerance band.

As for the medium-term target of 4 percent, CPI inflation has exceeded it for 37 months in a row.

October Internals

The fall in inflation in October was driven by a favourable base effect, which more than cancelled out a 0.8 percent month-on-month increase in the general index of the CPI.

In October 2021—the base period for the latest inflation print—the general index had surged 1.4 percent on a month-on-month basis. Had the index not changed at all last month, which would be indicative of no price momentum, the inflation would have fallen to as low as 5.9 percent.

However, an unchanged index was unlikely, with the data showing the indices for each of the six groups of the CPI basket posting a sequential rise.

In the "food and beverage" group of the CPI, 10 of 12 sub-groups saw their index rise month-on-month. The highest increase was seen in vegetables (4.1 percent), followed by spices (1.3 percent) and cereals (1 percent).

The sequential increase in the fuel index, at 0.5 percent, was less than half that of the food index.

Core inflation, or inflation minus the volatile food and fuel items, edged down marginally to 6 percent in October from 6.1 percent in September, as per Moneycontrol calculations.

Policy Impact

Despite inflation falling significantly in October, it is unlikely to influence the RBI's near-term interest rate decisions.

"While inflation on both retail and wholesale indices has been on a moderating trajectory, evolving risks would warrant policymakers to take a cautious view,” Rahul Bajoria, Barclays' chief India economist, noted earlier in the day following the release of the wholesale price data.

"We continue to expect the Monetary Policy Committee (MPC) to deliver a 35 basis point rate hike at the December meeting to bring the repo rate to 6.25 percent."

The Wholesale Price Index (WPI) inflation fell to a 19-month low of 8.39 percent in October from 10.7 percent in September, data released by the commerce ministry showed.

Economists expect wholesale inflation to continue falling but the benefit of the reduced input costs will be passed on to consumers with a lag.

As such, the MPC is seen hiking the repo rate again at its December 5-7 meeting.

The RBI's rate-setting panel has raised the repo rate by a staggering 190 basis points in the last six-and-a-half months to 5.9 percent. However, there are signs that members are becoming reluctant to keep hiking the repo rate, with external member Jayanth Varma saying in the minutes of the September 28-30 meeting that the committee "should now pause rather than focus on further tightening".