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The material easing seen in September CPI to 5.02%, led by a sharp reversal in perishable food prices, is likely to continue in October, resulting in a <5% print. With non-perishables are showing signs of persistence, overall food inflation is likely to remain relatively elevated, with risks from a potential weak kharif harvest as well. Core inflation will ease further in H2FY24, and will undershoot headline inflation by 60-65bps in FY24E. We see FY24E inflation at 5.2% (RBI: 5.4%), with the RBI likely to keep rates on hold ahead, and not precede the Fed in any policy reversal in CY24.

Headline CPI falls to 5.02%, led by moderating food inflation CPI inflation

fell to 5.02% YoY in September (Emkay: 5.32%; Consensus: 5.40%; prior: 6.83%), led by a sharp fall in food inflation, full impact of LPG price cuts, and a favorable base effect. There was a sequential decline in headline inflation (-1.1% MoM) for the second month in a row. Food inflation (-2.2% MoM) declined to 6.6% YoY vs 9.9% prior, with vegetables (-15.8% MoM) continuing their rapid reversal after the sharp spike in July. Tomato prices fell 65%, almost completely reversing the price spike seen in June and July. Prices of other food commodities were mixed — pulses (4.1% MoM), spices (1.8% MoM) and cereals (1.2% MoM) saw significant momentum, while fruit (-1.1% MoM) and oils & fats (-0.4% MoM) declined. Milk prices (0.1% MoM, 6.9% YoY) rose at the slowest monthly pace in 28 months, offering hope that the persisting price spike since last year may be moderating. Prices of eggs (2.3% MoM) and meat & fish (1.7% MoM) increased due to renewed demand following the end of the Hindu Shravan month. Energy inflation declined (-3.9% MoM, -0.1% YoY) as consumers felt full impact of the LPG price cuts.

Demand-driven core inflation declines, with lowest monthly increase in 6+ years

Core inflation (ex-food, fuel, intoxicants) declined to 4.6% YoY (prior: 4.9%), helped by a favorable base effect, while sequential momentum was flat (0.0% MoM vs. 0.4% prior). This is the lowest print since Mar-20, while the monthly change was the lowest in over six years. Momentum was led by clothing & footwear (0.3% vs 0.2%) and personal care (0.2% vs 0.2%), while education (0.4% vs 1.0% prior), housing (-0.1% vs 0.6% prior), HH goods & services (0.1% vs 0.3% prior) and transport & communication (0.1% vs 0.2% prior) saw slower momentum. We expect core inflation to continue moderating and clock an average of ~4.5% for the next few months (FY24E: 4.7%).

Higher Aug-23 IIP on favorable base, albeit with robust sequential momentum Aug IIP was better than expected, rising 10.3% YoY (Emkay: 10.9%; Consensus: 9.1%; prior: 6.0%), largely due to a low base. Sequential momentum was robust as well, with all sectors apart from mining and consumer non-durables seeing healthy growth. Manufacturing output rose 9.3% YoY, with healthy growth in computer & electronic products as well as in fabricated metal products offsetting the decline in pharma, apparel and beverages. Electricity rose 15.3%, while mining activity was up 12.4%. In use-based sectors, all sub-sectors saw positive growth.

Headline CPI to go below 5% in October, but the RBI to stay put

We are currently tracking October inflation at 4.6%. October, thus far, has seen prices of pulses rising significantly, along with those of onions and cereals. Food inflation is exhibiting a worrying trend, with sustained inflation for non-perishables (pulses, cereals, spices) keeping overall inflation elevated, even as transient price spikes for perishables fade. The erratic monsoon and weak sowing (especially for pulses and rice) may lead to a decline in harvests, putting further upward pressure on prices. This requires robust supply-side policies for mitigation, but will take time to impact the market. We see FY24E inflation at ~5.2% (RBI: 5.4%). With core inflation easing in September, it will likely undershoot headline by ~60- 65bps in FY24E. Easing core inflation and relatively elevated food inflation in H2FY24 will keep the RBI on hold, with a focus on the durable elements of inflation.  

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