India's retail inflation falls again in October, hits 5-month low of 4.87%

While prices of tomato have cooled, those of onion have increased and exerted upward pressure on headline retail inflation.

India's headline retail inflation rate fell to 4.87 percent in October, according to data released by the Ministry of Statistics and Programme Implementation on November 13, thanks to the combination of a favourable base effect and cooling prices of some items. However, rising onion prices kept the fall in inflation in check.

Consumer Price Index (CPI) inflation print in September was 5.02 percent.

At 4.87 percent, the latest CPI inflation figure is broadly in line with expectations, with economists having predicted prices likely rose 4.8 percent year-on-year in October.

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Although headline inflation remained within the Reserve Bank of India's (RBI) tolerance range of 2-6 percent for a second month in a row, it has now been above the medium-term target of 4 percent for 49 consecutive months.

Inflation internals

The October inflation number was largely along expected lines, with food inflation unchanged from September as items within the category cancelled each other out.

Among food items, vegetables led the charge as their index rose 3.4 percent month-on-month (MoM) primarily due to a 15 percent sequential increase in onion prices. Meanwhile, the two other key vegetables - potato and tomato - were more supportive of disinflationary developments. While potato prices were unchanged in October compared to September, those of tomato fell 19 percent MoM.

Helping balance these pressures were edible oils, whose index fell 0.8 percent MoM in October. On the whole, food inflation in October was 6.61 percent, little changed from September's 6.62 percent.

Overall, the general index of the CPI rose 0.7 percent MoM in October, while the Consumer Food Price Index increased by 1.1 percent from September.

Food items apart, price momentum was largely subdued - although the housing index rose 0.9 percent MoM after having declined by 0.1 percent MoM in September - as the 'clothing and footwear' and 'miscellaneous' categories posted sequential increases of 0.4 percent and 0.1 percent, respectively.

This helped bring down core inflation - or inflation excluding food and fuel - to 4.2 percent from 4.5 percent in September.

"The moderation in core inflation indicates that generalisation of price pressures has not taken place," noted Gaura Sen Gupta, India Economist at IDFC First Bank.

Policy impact

While headline retail inflation has now fallen below the 5 percent-mark for the first time since June, it is expected to now rise in November and December as the base effect turns unfavourable.

"In our view, the CPI inflation would climb to 5.6 percent by December, and remain in a wide range of 4.9-5.6 percent thereafter for the next two quarters, before a particularly benign base effect temporarily dampens it in July-September 2024," said Aditi Nayar, Chief Economist at ICRA.

As per the RBI's own forecast, CPI inflation is set to average 5.6 percent in the current quarter. With the October print at 4.87 percent, inflation must average 6 percent in November-December for the RBI's forecast to be met. While current trends suggest the RBI's forecast may be undershot, it may not result in any easing of monetary policy by the RBI's Monetary Policy Committee (MPC), with IDFC First Bank's Sen Gupta of the opinion that the MPC may retain the repo rate at 6.5 percent possibly up to the middle of 2024-25.

Also Read: Rate cuts not on the agenda at the moment, says RBI Governor Das

"Hence the monetary policy stance 'withdrawal of accommodation' is unlikely to change anytime soon with CPI inflation remaining above 4 percent target," Sen Gupta said.

ICRA's Nayar, too, expects the MPC to maintain a hawkish tone and leave the repo rate and stance unchanged at its next meeting, which will be held from December 6-8.

"We anticipate that inflation will fluctuate between 4 percent and 5 percent over the next twelve months. We therefore see little likelihood of any rate action occurring within this time frame," Sujan Hajra, Chief Economist at Anand Rathi Shares and Stock Brokers, said.