CPI inflation seen only a tad lower at 6.4% in February; cereal issues may persist

The behaviour of the cereals index of the CPI in January left economists flummoxed

India's headline retail inflation is expected to have edged down only marginally in February from January's three-month high of 6.52 percent. According to a Moneycontrol poll of economists, Consumer Price Index (CPI)-based inflation is expected to have eased to 6.4 percent last month.

The estimates ranged between 5.89 percent and 6.62 percent. The Ministry of Statistics and Programme Implementation will release retail inflation data for February 2023 at 5.30 pm on March 13.

"Without data adjustments for cereals, we project February CPI at 6.3 percent," noted Raul Bajoria, Barclays' chief India economist, referring to the unexpected jump in the index for the 'cereals and products' subgroup of the CPI in January.

On February 13, the statistics ministry said the index of cereals rose 2.6 percent month-on-month in January.

However, economists pointed out that a manual computation of the same, using the 20 individual components of the subgroup, showed the increase to be far lower and would have resulted in a headline CPI inflation rate that was 20-35 basis points lower than 6.52 percent.

One basis point is one-hundredth of a percentage point.

The statistics ministry has stood by its numbers. Moneycontrol exclusively reported on March 9 that the unexpectedly large increase in CPI inflation in January was due to the provision of free food grain, which forced a tweak in the inflation computation methodology. This issue may reoccur in the February data.

Expected inflation internals

Cereal issues apart, economists say food prices eased in February compared to January. "Headline CPI inflation might have eased in February on account of a significant decline in the prices of vegetables, select pulses, edible oils, etc., and that of the fuel and light category," noted Rupa Rege Nitsure, group chief economist at L&T Financial Services.

According to the Department of Consumer Affairs, prices of 15 of the 22 items the department collates data on declined in February from January. The items, whose prices fell the most month-on-month were potatoes (down 10.1 percent), onions (down 5.8 percent), tomatoes (down 5.1 percent), and the six edible oils (down 0.4-2.4 percent).

The seven items to have witnessed a sequential increase in prices included cereals (up 0.8-1.4 percent), milk (up 0.4 percent), and salt (up 0.9 percent).

The fading away of an unfavourable base effect is also expected to keep inflation in check.

The general index of the CPI had contracted by 0.3 percent month-on-month to 165.7 in January 2022 – the base period for calculating January 2023's inflation figure. This created a low base and pushed up inflation.

However, in February 2022, the CPI general index increased sequentially by 0.2 percent.

Calculations by Moneycontrol show that the general index of the CPI must increase by at least 0.2 percent month-on-month in February 2023 for inflation to increase further from 6.52 percent.

Like headline inflation, economists see core inflation – or inflation excluding food and fuel – only decreasing modestly, largely due to a fall in prices of gold.

Policy impact

At 6.4 percent, economists' prediction for the February retail inflation print would be the 41st month in a row that it would have been higher than the Reserve Bank of India's (RBI) medium-term target of 4 percent. Also, it would be above the 6-percent upper bound of the mandated range for the second straight month, which is building expectations of another repo rate hike by the Monetary Policy Committee (MPC) in April.

"The overshoot of inflation for two straight months, combined with a hawkish set of minutes from the last MPC meeting, suggests that the balance of risks is tilted towards another hike at the April meeting," Barclays' Bajoria said.

The RBI said in early February that it expects CPI inflation to average 5.7 percent in the current quarter, down from 6.1 percent in the last quarter of 2022, before easing to 5.3 percent in 2023-24.