Vegetables, base effect propel retail inflation to 5.55% in November

Although headline inflation remained within the Reserve Bank of India's (RBI) tolerance range of 2-6 percent for the third month in a row, it has now been above the medium-term target of 4 percent for 50 consecutive months.

Inflation internals

While the November inflation number was lower than expected, its drivers were as economists had predicted, with an unfavourable base effect playing a key role in pushing inflation higher.

The overall price index had fallen by 0.1 percent month-on-month (MoM) in November 2022 – the period on the basis of which last month's inflation number will be calculated.

In terms of the price momentum, food items were the dominant force, with the Consumer Food Price Index posting a sequential increase of 1.1 percent in November as opposed to the 0.5 percent MoM increase in the general index of the CPI.

Other food items to show strong price momentum included egg (2.8 percent rise MoM), pulses (1.6 percent), sugar (1.2 percent), and cereals (0.9 percent). Meanwhile, fruits and edible oils declined by 0.4 percent and 0.2 percent, sequentially.

On the whole, food inflation as per the CPI rose to 8.70 percent in November from 6.61 percent in October.

Food apart, the price momentum was largely subdued, with the price indices for housing, clothing and footwear, fuel and light, and miscellaneous categories only rising by 0.1-0.3 percent each compared to their October levels. This helped bring down core inflation - or inflation excluding food and fuel - further to 4.1 percent in November from 4.3 percent the previous month.

"Core inflation is currently reaching the RBI's target rate," Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers, noted.

Policy impact

While headline retail inflation has come in lower than expected in November, it will do little to change the course of India's monetary policy.

"We believe that the policy rates are appropriate at the current juncture and no further tightening is warranted in the near term, unless there is a durable shock to the CPI inflation trajectory," Aditi Nayar, chief economist at ICRA, said.

"Consequently, we expect the Monetary Policy Committee (MPC) to maintain status quo for the next couple of policy meetings, and foresee a shallow rate cut cycle of around 50-75 basis points, commencing in the August 2024 meeting," Nayar added.

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Last week, the MPC had retained the policy repo rate at 6.5 percent for the fifth meeting in a row, with the rate-setting panel noting that "recurring food price shocks are impeding the ongoing disinflation process".

"The path of disinflation needs to be sustained. The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation," it had added.

As per the RBI's latest forecast, CPI inflation is seen averaging 5.6 percent in October-December. With data for the first two months of the current quarter available, retail inflation must rise even further to 6.4 percent in December to meet the Indian central bank's projection.

"The December CPI inflation estimate is tracking at 6.2-6.4 percent, as base-effect turns adverse," said Gaura Sen Gupta, India economist at IDFC First Bank.

"High-frequency food prices in the first two weeks of December show that vegetable prices have moderated, reflecting improved supply dynamics. That said, the moderation is much lesser than the usual winter season decline," Sen Gupta added.

Inflation data for December will be released on January 12. It will be the last set of inflation numbers before the central government presents the Interim Budget for 2024-25 on February 1 and the MPC meets on February 6-8 for its next sit-down.