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Below View On Reactions on CPI data by Anitha Rangan, Economist, Equirus

“Headline inflation for Dec-22 is 5.72% compared to 5.9% in Nov-22 and declining sequentially by -0.45% (vs -0.11% last month). This marks the second sequential decline since Jan-22. The lower-than-expected headline figure is on account of further sharp easing in vegetable prices while cereals, milk products and spices remain stubbornly high. The overall food index eased to 4.2% from 4.7% in Nov. Besides, higher input costs continue to weigh on core inflation (Ex. Food and fuel) is increasing upwards from 6.0% to 6.4%, indicating that pass through of wholesale prices is ongoing both on the goods and services side. Core components of household goods, health, personal care & effects remain high. Housing and education continue to be sticky.

While headline inflation easing is a comfort, core inflation remains sticky and is rising. Support from a good crop could bring down cereal led inflation as well. While the sowing of Rabi crops has gained strong momentum in wheat and oilseeds (mustard) and procurement of rice has also begun at a robust pace, weather related risks need to be watched for. With the easing of the global food supply chain, the prospect of inflation remaining below 6% in Q4 is likely. There are talks that the government is unlikely to extend free food grain distribution and will offload some surplus stock to cool down cereal prices.  While sticky core inflation could remain, at least food related impulses could drive inflation downwards. Core could however remain stubborn over the next one year. However, as long as RBI sticks to headline inflation, the case for a pause becomes stronger. The recent reference to core inflation may test this thesis, however fiscal pressures with a high gross borrowing and growth support (amidst global weakness) may warrant a pause. If the Fed is going to hike 25 bp, RBI might rather pause and give its domestic growth a chance.”

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