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CPI inflation below our expectations in Nov’21

Reverse repo rate hike in Feb’22 is on the cards

* CPI-based retail inflation came in at 4.9% YoY in Nov’21 as against 4.5% YoY in Oct’21. The number is below our forecast of 5.3% YoY and Bloomberg consensus of 5.1% YoY. It implies that Apr-Nov’21 inflation averaged 5.2% YoY as against 6.9% YoY during Apr-Nov’20.

* Food inflation stood at 1.9% YoY in Nov’21 (v/s our forecast of 2.9% YoY) as compared to 0.9% YoY in Oct’21. Lower deflation in ‘vegetables’ resulted in it contributing higher to overall inflation in Nov’21 v/s Oct’21. CPI inflation, excluding vegetables, stood at 6.7% YoY, similar to what it has been in the previous five months. Just like in Oct’21, the other items propelling rise in headline inflation was ‘cereals and products’, ‘fruits’, ‘milk and products’, and ‘sugar confectionery’. Notably, ‘fuel and light’ (CPI weightage: 6.8%) inflation came in lower at 13.3% YoY in Nov’21 after three-months of consecutive rise.

* What’s a little worrying is that core inflation remained elevated at 6.2% YoY in Nov’21 as slightly higher inflation in ‘housing’ and ‘clothing and footwear’ was offset by marginally lower inflation in ‘miscellaneous’ items. Within ‘miscellaneous’ items, inflation in health, education and transport, and communication came in lower in Nov’21.

* Overall, while headline inflation was lower-than-expected, it doesn’t change anything materially. We expect it to touch 6% YoY by Jan’22. Core inflation, however, might remain high at 6%. Therefore, the explicit normalization of monetary policy will likely begin with a 15bp reverse repo rate hike in Feb’22.

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