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Food CPI contained; core elevated

November CPI increased by 40bp to 4.9%, broadly in line with estimates. Key trends: i) Food inflation remained contained at 2.7%, mainly led by large deflation in vegetables (although rising sequentially), sharp disinflation in pulses and eggs, meat and fish (30- month lows), and low cereals/milk inflation. ii) Core inflation, however, remained sticky at 6.1% with goods and energy-related inflation being high (>6%) while services remains contained (~4%).

In the near term, CPI is likely to move higher till Q4FY22, before easing in H1FY23. This is broadly tracking RBI’s inflation trajectory. Beyond statistical base effects, the cut in fuel excise duties and some food items such as edible oils, and peaking WPI should help ease inflation.

Food inflation rises, but still very contained

Food inflation for November rose by 90bps to 2.7% – largely attributable to a falling base. Within components, the story remains broadly the same with vegetables being the main source of deflation (-14% YoY). Apart from it, inflation remains low in cereals and milk while high in edible oils. Pulses and meat and fish inflation, which was running high until now, is disinflating with both of them being sub-6%—a 30- month low for both. Going ahead, food inflation is likely to rise from December onwards owing to: i) an adverse base effect; and ii) a sequential spike in vegetables owing to unseasonal rains. On the flip side, inflation should moderate in edible oils (duty cuts) and disinflation should continue in pulses and eggs, meat and fish.

Core inflation remains elevated owing to input price pressures

Core inflation on reported basis remained sticky around 6.1% (ex-commodities: 5.5%). Within core inflation, the story remains broadly same. Higher input prices are weighing on goods inflation (FMCG, textiles, etc), which continues to be elevated (>6%). However, inflation in domestic demand-oriented services (housing, education, etc) remains contained, reflecting weak domestic demand. Energy and transportation services inflation is now easing owing to both base effects as well as excise duty cuts, although the level still remains high.

Inflation is broadly tracking RBI’s trajectory

Going ahead, we expect headline inflation to rise till Q4FY22 as base effects reverse. The inflation trajectory is broadly tracking RBI’s revised trajectory. For FY22, we maintain inflation forecast of 5.5% (RBI: 5.3%), with the recent fuel excise duty cuts providing relief. Sustained vegetables’ spike remains the key risk to our outlook.

Given that inflation is tracking RBI’s trajectory, we expect the central bank to maintain its accommodative stance to support growth, especially when fiscal impulse is fading and economic recovery is still uneven. Nonetheless, it’s likely to continue with liquidity normalisation (which could lift short-end rates). The key challenge for the central bank arises from the global front—both in terms of liquidity tightening (as capital flight complicates policy choices) and growth uncertainties (fading global reflation, Omicron, etc).

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