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October 22 CPI and WPI inflation in line with market expectations

The RBI may still hike repo rate by 50bp in December 22

* Headline inflation came in at a three-month low of 6.8% YoY in Oct’22 as against a sharp 7.4% YoY in Sep’22. The number is in line with Bloomberg consensus but lower than our forecast of 7% YoY.

* Food inflation came in at an eight-month low of 7% YoY last month compared to 8.6% YoY a month ago. Lower food inflation was entirely led by an eight-month low vegetables inflation of 7.8% YoY as against 18.2% YoY a month ago. Core inflation remained sticky at 6.2% YoY in Oct’22 v/s 6.3% YoY in Sep’22.

* Although headline CPI came lower in Oct’22, the details do not suggest a cheer: a) Core CPI as per global standards (all items ex food & energy) rose up to 6.6% YoY last month v/s 6.4% YoY in Sep’22, highest since the series began in 2015 and higher than 6.5% in Apr'22; b) services inflation rose to a 40-month high of 5.6% YoY in Oct’22 v/s 5.5% YoY in Sep’22. A point worth mentioning is that domestic services inflation is still increasing gradually than many other nations; c) detailed analysis of 299 components confirm that as much as 63% (v/s 64% in Sep'22) of the CPI basket posted 5%+ inflation in Oct’22 (with 54% showing 6%+ inflation v/a 55% in Sep'22). On a brighter note, imported inflation eased sharply to 5.9% YoY in Oct’22 – the lowest since Jan'20. Domestically generated inflation was at 6.8%, lower than 7.3% YoY a month ago.

* Separately, WPI inflation came in at a 19-month low of 8.4% YoY in Oct’22 as against 14.2% YoY in 1HFY23. This is broadly in line with Bloomberg consensus of 8.5% YoY. Lower WPI inflation was on account of lower primary food inflation during the month.

* Overall, an inflation of 6.8% is nothing to cheer about. If 2QFY23 real GDP growth comes in stronger than expected (which is what we expect), the RBI may go for another 50bp rate hike next month, though 35bp is still the consensus. We continue to believe that the terminal repo rate could be 6.50-6.75% by the end of FY23, followed by a long pause in FY24.

* CPI inflation in line with Bloomberg consensus: Headline inflation came in at a three-month low of 6.8% YoY in Oct’22 v/s a sharp 7.4% YoY in Sep’22. The number is in line with Bloomberg consensus but lower than our forecast of 7% YoY.

* CPI declined due to lower food inflation: Food inflation came in at an eightmonth low of 7% YoY last month v/s 8.6% YoY a month ago. Lower food inflation was entirely led by an eight-month low vegetables inflation of 7.8% YoY v/s 18.2% YoY a month ago. Excluding vegetables, food inflation actually remained unchanged at 6.9% YoY last month. Other items within food – ‘cereals and products’, ‘meat and fish’, ‘milk and products’ came in higher in Oct’22 v/s Sep’22.

*Core inflation sticky: Core inflation stood at 6.2% YoY in Oct’22 v/s 6.3% YoY in Sep’22. Of the three components of core inflation, ‘housing’ and ‘clothing and footwear’ remained flat at 4.6%/10.2% YoY, respectively, in Oct’22. Inflation for ‘Miscellaneous’ items inched marginally lower to 5.9% YoY in Oct’22 as against 6% YoY in Sep’22.

* Details of CPI do not paint a rosy picture: Although headline CPI came lower and in-line with market consensus, the details do not suggest a cheer: a) Core CPI as per global standards (All items ex food & energy) inched up to 6.6% YoY last month v/s 6.4% YoY in Sep’22, the highest since the series began in 2015 and higher than 6.5% in Apr'22; b) Services inflation rose to a 40-month high of 5.6% YoY in Oct’22 v/s 5.5% YoY in Sep’22. A point worth mentioning is that domestic services inflation is still increasing gradually than many other nations; c) detailed analysis of 299 components confirm that as much as 63% (v/s 64% in Sep'22) of the CPI basket posted 5%+ inflation in Oct’22 (with 54% showing 6%+ inflation v/a 55% in Sep'22). On a brighter note, imported inflation eased sharply to 5.9% YoY in Oct’22 – the lowest since Jan'20. Domestically generated inflation was at 6.8%.

* RBI may still hike repo rate by 50bp in Dec’22: Overall, an inflation of 6.8% is nothing to cheer about. If 2QFY23 real GDP growth comes in stronger-thanexpected (which is what we expect), the RBI may go for another 50bps rate hike next month, though 35bp is still the consensus. We continue to believe that the terminal repo rate could be 6.50-6.75% by the end of FY23, followed by a long pause in FY24.

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