At likely inflation of 5.8%, upper-limit of RBI's tolerance band faces acid test again

The statistics ministry will release Consumer Price Index data for November later today at 5:30 pm.

India's headline inflation rate likely jumped to 5.8 percent in November from October's 4.87 percent, according to a Moneycontrol survey of 15 economists, with an unfavourable base effect and resurgence in prices of vegetables and pulses propelling inflation to a three-month high.

The Ministry of Statistics and Programme Implementation will release retail inflation data for November later today (December 12) at 5:30 pm.

After declining sharply in the last three months – the October print of 4.87 percent was more than 250 basis points from July's 7.44 percent – Consumer Price Index (CPI) inflation is expected to have risen sharply last month close to the upper end of the Reserve Bank of India's (RBI) 2-6 percent tolerance range - both due to statistical reasons and higher price momentum - with Governor Shaktikanta Das saying on December 8 that inflation management "cannot be on auto-pilot".

"The future path is expected to be clouded by uncertain food prices. CPI data for November is expected to be high," Das had said last week while announcing the Monetary Policy Committee's decision to stay pat on interest rates for the fifth meeting in a row. One basis point is one-hundredth of a percentage point.

Food on fire

According to data from the Department of Consumer Affairs, onion prices were up 58 percent month on month (MoM) in November, while that of tomatoes rose 35 percent. Even potato, which has been a beacon of stability in comparison to the two more volatile vegetables, saw a 2 percent pick-up in prices in November.

"Uneven rainfall damaged some 2023 rabi crops and the delayed monsoon arrival caused a delayed harvesting cycle of kharif crops; together, this is causing tighter supplies," Rahul Bajoria, managing director and head of EM Asia (ex-China) Economics at Barclays, said.

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Bajoria, though, is more worried about the price momentum in another key food item: pulses.

In November, prices of the five pulses on which the consumer affairs department collates data rose by 0.1-2.9 percent MoM after posting a sequential increase of 0.8-3.7 percent in October, with tur dal being the biggest source of concern in both months.

"While pulses imports are at multi-year highs, and have been on an upward trend since July 2023, this is unlikely to bridge India's sizeable demand-supply gap. Hence, pulses CPI inflation will likely remain in double-digits in the near term," Bajoria, who expects 'food and beverage' to rise to 9.2 percent from 6.2 percent, warned.

Unfavourable base

An unfavourable base effect will also push inflation higher, with the price index having fallen by 0.1 percent MoM in November 2022 – the period on the basis of which last month's inflation number will be calculated.

Also Read: No forward guidance again from RBI Governor Das, but clues remain

Meanwhile, the RBI's forecasts suggest CPI inflation will stay elevated in both November and December. According to the central bank, inflation will average 5.6 percent in October-December. With the data for October already available, inflation must come in at roughly 6 percent in each of the last two months of 2023 for the RBI's forecast to be met.

"Unless vegetable prices decline sharply, CPI inflation will likely stay around similar levels in December as well, but thereafter will moderate to 5.0 average in January-March 2024 as new crops arrive at the market," said Kaushik Das, Deutsche Bank's chief economist for India and South Asia.