Tuesday's Talking Points
Moderation in Inflation likely to continue!
What’s the Point? (A Brief Summary)
For almost the entirety of FY24, inflation has stayed below RBI’s upper limit of 6%, with the latest figure for February at 5.1%. FY24 Average inflation has been 5.4% vs. 6.8% in FY23. Core inflation has trended lower for a year now, with various measures of core inflation being around 3.5%, a multi-year low. The latest ‘Monthly Economic Review’ by the Ministry of Finance mentioned the outlook is ‘Positive’, helped by moderation in price pressures and favourable agricultural activity. RBI projections state that FY25 inflation could moderate to 4.5%, with risks evenly balanced.
Numbers in Perspective
Source: CMIE, RBI. Inflation range is the 4% +/-2% that the Monetary Policy Committee is mandated under the Inflation Targeting regime.
Different forms of Core inflation: Core CPI (excluding food, fuel and light); Core Core CPI (excluding food, fuel, light, and motor fuels); Super core CPI (excluding food, fuel, light, motor fuels and rent)
Food Prices have been pulling up Inflation, but could benefit from better monsoons and pick-up in agriculture
Inflation within the food portion of CPI was high, with CPI-Food reporting inflation of 8.7% in Feb’24, and 7.4% in FY24. Food accounts for ~39% of the overall weight within the index. In particular, vegetables and pulses have been pulling up inflation, with major items like onion (3M average inflation: 42%) and tomatoes (3M average inflation: 38%) pulling up prices. Going forward, inflation from food prices could reduce, owing to expectations of a better monsoon (read our Talking Point “From El Nino to La Nina – Another Positive for Indian Economy!”) and steps being taken to ensure domestic supply of produce, such as the Onion Export Ban. Agricultural activity indicators are also favourable, with Rabi numbers indicating increase in production of wheat and rice by ~1%, while the Kharif sowing has begun well, being 7.3% higher as of March 15, 2024 vs the same time last year.
Core Inflation could continue to remain low
India’s “Core Inflation” has been seeing a secular decline for the past year, with various measures of inflation now at ~3.5%. This is aided by a mix of factors affecting different portions of the core inflation basket. The goods component of core inflation has seen a drop with the help of commodity prices coming off globally, which is translating into lower input prices. This has also been reflected in Wholesale Prices Inflation being marginally negative for FY24 (average of -0.8%). With global price pressures being weak, this trend within the goods component could continue. Within the services component, slower consumption growth levels could explain the drop in inflation. Private Final Consumption Expenditure has been one of the slower segments in the overall strong GDP data for recent quarters.
Interesting Side-Note: Food Inflation to get Smaller Weight in Inflation Calculations
As per the latest Household Consumption Expenditure Survey (HCES) 2022-23, the weight of food items in the Monthly per capita Consumption Expenditure (MPCE) has gradually fallen to 46.4% for rural India (from 52.9% in 2011-12 survey) and to 39.2% for urban India (from 42.6% in previous survey). Currently, the share of food & beverage in India's CPI basket at 46% is one of the highest across Asian economies. While food will still continue to have a dominant share in overall CPI index, it is expected that the weight of food and beverage segment will come down to 42%, once the updated HCES results for 2022-23 are incorporated. This could lead to lower volatility in inflation numbers.
Conclusion
Inflation has very strong outcomes for the broader economy in terms of outlook and spending patterns. High growth and rangebound inflation bode well for consumption to pick up, as they lead to high real income growth and ability for consumers to spend. This is reflecting in high consumer confidence numbers.
Inflation is also a key determinant of monetary policy, and current numbers and trends lead us to believe that monetary policy could see some rate cuts during the year. Expectations of rate cuts are favourable for investments into Fixed Income funds with longer ‘durations’.
Despite the positive trend, the key risks to inflation – shocks in food prices and rise in commodity prices due to escalation in geopolitical crisis – remain. Both these factors need to be watched out for from an inflation and monetary policy point of view.
Sources: Press Information Bureau, Centre for Monitoring Indian Economy (CMIE), RBI and other publicly available information
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