Why does CRISIL expect core inflation to remain elevated in FY24?

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Core inflation, which is inflation minus its volatile components and is considered a better indicator of demand conditions, is expected to remain elevated in India in FY24, according to Crisil.

Persistence of high core inflation restricts the Reserve Bank of India’s (RBI’s) ability to ease monetary policy, stated the rating agency, in its latest report on India's outlook.

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CRISIL estimates that core inflation will rise 5.5 percent year-on-year (YoY) in FY24 against 5 percent of overall (headline) inflation. The other components in the inflation measure, which are the fuel and food-inflation-growth figures, are expected to be at 3 percent and 4.7 percent respectively.

Policymakers have expressed bafflement at core inflation’s stickiness. “We still are to understand why core inflation is sticky,” said EAC-PM part-time member Sajjid Z Chinoy had said at Crisil’s India outlook seminar. But the rating agency’s analysts have put the stickiness down to two reasons: producers passing on the cost to consumers and services-led price rise.

“Producers had seen a sharp rise in input costs since fiscal 2022 but were unable to fully pass on the prices amid weak demand conditions,” stated the report.

“The pickup in demand in fiscal 2023 enabled them to raise selling prices,” it added.

While input and output costs have come down in recent months, input cost pressures remain. The agency has analysed wholesale price inflation (WPI) and has found that the ratio of input WPI to output WPI has remained above 1 in FY23. “A ratio above 1 poses upside risk for CPI inflation since it indicates that the pass-through can continue,” CRISIL’s report stated.

Services-led inflation has come out as a pandemic after-effect.

“Typically, services inflation outpaced goods inflation in India in the years before the pandemic. This however changed during the pandemic as demand for goods rose and contact-intensive services were restricted. Services inflation as a result softened compared to goods,” stated the report.

“As demand for services continues to recover, pressure on services inflation is likely to continue next fiscal, while that for goods moderates,” it added.

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With sticky core inflation, rate hikes are likely to continue.

In February, the central bank had raised rates by 25 bps, which was half of the 50 bps hike in December 2022 and a third of the 75-bps hikes done four times before that. This was read as the central bank easing its monetary policy.

However, Chinoy said at the seminar that there may be another rate hike in the April Monetary Policy Committee (MPC) meet. “India should not prematurely stop (rate hike) and be surprised later,” he said.