India's headline retail inflation rate fell to 5.02 percent in September, according to data released by the Ministry of Statistics and Programme Implementation on October 12, thanks to a huge drop in vegetable prices. At 5.02 percent, the Consumer Price Index (CPI) inflation print for September is 181 basis points lower than August's 6.83 percent.
One basis point is one-hundredth of a percentage point.
At 5.02 percent, the latest CPI inflation figure is well below expectations, with economists having predicted prices likely rose 5.4 percent year-on-year in September.
Meanwhile, the Reserve Bank of India's (RBI) latest forecasts, released on October 6, had implied an inflation reading of 4.8-5 percent for last month. Speaking at the annual meeting of the World Bank Group and International Monetary Fund (IMF) minutes after the release of the CPI data, RBI Governor Shaktikanta Das said the latest inflation print is exactly in line with the central bank's projections.
Although headline inflation has returned to the Indian central bank's tolerance range of 2-6 percent, it has now completed four full years above the medium-term target of 4 percent.
Inflation internals
The far larger than anticipated fall in CPI inflation in September - the economist closest to the print was Radhika Piplani of DAM Capital Advisors, who had forecast 5.13 percent - was due to the weakening of price momentum across the board.
| SEP 2023 INFLATION | CHANGE IN INDEX, SEP 2023 VS AUG 2023 | |
| CPI | 5.02% | -1.1% |
| Food | 6.56% | -2.2% |
| Cereals | 10.95% | 1.2% |
| Meat, fish | 4.11% | 1.7% |
| Oils, fats | -14.04% | -0.4% |
| Vegetables | 3.39% | -15.8% |
| Pulses | 16.38% | 4.1% |
| Fruits | 7.30% | -1.1% |
| Clothing, footwear | 4.61% | 0.3% |
| Housing | 3.95% | -0.1% |
| Fuel, light | -0.11% | -3.9% |
| Miscellaneous | 4.77% | 0.2% |
The Consumer Food Price Index fell 2.2 percent month-on-month (MoM) in September, led by a 15.8 percent sequential fall in vegetable prices. Consequently, food inflation slumped to 6.56 percent from 9.94 percent in August, pulled down by the sharp fall in tomato prices that had propelled headline retail inflation to 7.44 percent in July - the highest in 15 months.
However, other price pressures remain in the food segment outside of vegetables.
"...upward pressure persists in other food items with 50 percent of the food and beverages sub-components by weight, seeing 6 percent-plus inflation in September," noted Gaura Sen Gupta, India Economist at IDFC First Bank.
Cereals prices were up 1.2 percent MoM in September, while pulses rose 4.1 percent. Other sub-groups with a MoM increase in prices in September include meat and fish, egg, sugar, and spices.
Meanwhile, the indices for 'fuel and light' and housing were down 3.9 percent MoM and 0.1 percent, respectively. Further, the index for the miscellaneous category was up just 0.2 percent MoM and clothing and footwear rose by 0.3 percent from August.
As a result, core CPI inflation moderated further to 4.5 percent in September from 4.8 percent in August, per Moneycontrol's calculations.
Policy impact
The September inflation figure means the RBI's inflation forecast of 6.4 percent for July-September has been met, which will be a pleasant surprise to economists. However, they continue to warn of risks to the inflation outlook, including food.
"...the uneven monsoon, lag in sowing of crucial kharif crops such as pulses and oilseeds and modest reservoir levels do not augur well for the outlook for food inflation," noted Aditi Nayar, ICRA's Chief Economist.
According to Nayar, headline retail inflation will remain volatile in a wide range until June next year. However, she does not expect further monetary tightening from the RBI, which has stayed pat on rates in 2023-24 after increasing the policy repo rate by 250 basis points in 2022-23.
Also Read: RBI doubles down to ward off complacency as long rate pause gets longer
"While 5 percent is reached, the task downhill to 4 percent will remain a challenge in the near future," added Anitha Rangan, Economist at Equirus, pointing towards the emphasis the RBI has placed in recent months on its target being 4 percent and not 2-6 percent.
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