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CPI inflation cools off more than expected in Aug’21

Policy interest rates to remain unchanged in FY22

* The headline Consumer Price Index (CPI) eased to four-month lows of 5.3% YoY in Aug’21, far below the Bloomberg consensus and our expectation of 5.6% (similar to that in Jul’21). In the first five months of FY22, headline inflation averaged 5.5% – v/s 6.6% in the corresponding period last year and an average of 4% in the corresponding period in the previous five years.

* Almost the entire deceleration in headline inflation was on account of ‘vegetables’, which witnessed deflation of 11.7% YoY last month. Consequently, food inflation also came in at four-month lows of 3.1% YoY, compared with 3.9% in Jul’21 and our expectation of 3.8%. Some other components in the food basket, such as ‘pulses & products’, ‘eggs’, ‘meat & fish’, and ‘fruits’ saw lower prices MoM, while prices of ‘cereals & products’, ‘oil & fats’, ‘milk & products’, and ‘spice’ increased on a monthly basis in Aug’21.

* Excluding food & beverages (F&B); pan, tobacco & intoxicants (PT&I); and fuel & light (F&L), core inflation further eased moderately to 5.9% YoY last month (from 6% YoY in Jul’21). Within the core components, inflation in ‘personal care & effects’ eased to six-year lows of 1% YoY in Aug’21.

* Overall, we continue to believe headline inflation would ease further towards 4.2–4.3% over Oct–Nov’21, before rising to 5.5% once again in 4QFY22. We would not be surprised if the long-pending reduction in retail fuel taxes is announced around Diwali in early Nov’21. If so, this may further help keep headline inflation marginally lower than otherwise.

* Today’s inflation print is unlikely to influence monetary policy decisions, although it confirms that higher inflation during lockdowns is probably related more to methodology protocols than economic fundamentals. Over the remaining three monetary policy meetings in FY22 (Oct’21, Dec’21, and Feb’22), while a hike in reverse repo is possible, we do not expect any changes in policy interest rates.

* Retail inflation eases off more than expected in Aug’21

* CPI inflation was at four-month lows of 5.3% YoY last month…: Headline retail inflation cooled off to 5.3% YoY in Aug’21, far below the Bloomberg consensus and our expectation of 5.6% (similar to that in Jul’21). In the first five months of FY22, headline inflation averaged 5.5% – v/s 6.6% in the corresponding period last year and an average of 4% in the corresponding period in the previous five years (Exhibit 1).

* …entirely led by lower inflation in ‘vegetables’: Almost the entire deceleration in headline CPI was on account of lower inflation in ‘vegetables’, which holds 6% weightage in CPI (Exhibit 2). Vegetable prices witnessed deflation of 11.7% YoY last month. Consequently, food inflation also came in at four-month lows of 3.1% YoY vis-à-vis 3.9% in Jul’21 and our expectation of 3.8%. Some other components in the food basket, such as ‘pulses & products’, ‘eggs’, ‘meat & fish’, and ‘fruits’ saw lower prices MoM, while prices of ‘cereals & products’, ‘oil & fats’, ‘milk & products’, and ‘spice’ increased on a monthly basis in Aug’21.

* Core inflation was marginally lower last month: Excluding food & beverages (F&B); pan, tobacco & intoxicants (PT&I); and fuel & light (F&L), core inflation also eased moderately to 5.9% YoY last month (from 6% YoY in Jul’21). Within the core components, inflation in ‘personal care & effects’ eased to six-year lows of 1% YoY in Aug’21.

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