IGI Logo

RBI governor’s remarks at the MPC meet last week, raised expectations of an elevated CPI print on the back of spike in vegetable prices, however actual inflation surprised with a lower than expected CPI print. Admittedly food prices remained elevated, mainly among vegetables, pulses and cereals, as the impact of government’s supply side interventions are yet to reflect in prices. The decline in vegetable prices recently (1-11th Dec) in the retail market, hints at a favorable CPI print in December. But from a near term perspective, considering MPC is focused on aligning inflation with 4% target on a ‘durable basis’, we continue to expect for an extended pause in rate action by the MPC.

? Food led one-off spike: Governor’s remarks in the MPC meet last week had raised expectation for a food price led spike in CPI inflation (above 6% mark) in November as well as in December, however actual inflation print surprised on the lower side with a 5.55%, even beating market expectations of 5.78%. Admittedly food inflation remained elevated at 8.7% vs 6.6% prior, but within food category, pricing pressures were most notable in Pulses (20.2%, 1.6% MoM), Vegetables (17.7%, 5% MoM), Spices (21.5%, 0.5% MoM) and cereals (10.3%, 0.93% MoM). Lower Kharif sowing led to government’s supply side interventions in specific crops; however it is pertinent to note that these measures have not yielded desired results, most specifically in the case of cereals and pulses where pricing pressures continue to remain strong. Unlike expectations, we note that vegetable prices in the retail market were stable in November, except in case of tomato (+35%) and Onion (+7.8%). Moreover, Tomato (-7.8%), Onion (-3.6%) and Potato (-1.6%) prices have declined in the first 11 days of December, hinting at the possibility of favourable print in December as well. Even if we consider a 5.9% CPI print in December, RBI’s inflation forecast for Q3 FY24 (5.6%) will be higher by 20bps.

? Core continues its slow march: Core inflation (Net of food, fuel and intoxicants) continued to remain elevated as the pace of moderation was shallow (0.25% MoM vs 0.35% MoM prior). Most notable contribution came from Housing and Clothing & Footwear category (Ex 2). Although there are no signs of inflationary pressures getting generalised at this stage, we continue to expect gradual moderation in core category.

? IIP - Manufacturing continues to lead: Better than expected performance in IIP (11.7% vs 10.5% est.) in Oct’23 was already anticipated in the performance of Core industries (12.1%), moreover this should reflect in the GDP print of third quarter of current fiscal as well. Although manufacturing contributed the most in Oct’23, however the contribution of mining was also meaningful. Within manufacturing, only 17% of the categories declined vs 39% in Sep’23. Most notable improvement was reported in machinery equipment, motor vehicles, basic metals while textiles category showed signs of improvement. The decline in wearing apparel, computers and chemicals subsided in Oct’23.

? Actively disinflationary policy to align inflation to 4% target: MPC now expects inflationary pressures to ease substantially to its 4% target in Q2 of FY25. This has policy implications, as it would mean that the policy rates would remain elevated atleast till Q2 of FY25. Even in the MPC meet, governor’s emphasis was on looking through spikes in volatile components like food and most importantly aligning inflation with the 4% target on a “durable basis”. Our assessment of the manufacturing PMI revealed that inflationary pressures have been subdued across the EM economies. While the pace of decline in US CPI has been shallow; this in addition to the strength in the labour market would allow Fed to hold policy rates at elevated level. Although the MPC indicated that monetary policy would be “actively disinflationary”, we continue to expect an extended pause in rate action unless inflationary pressures broaden across categories, which seem unlikely at this juncture.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361