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The easing seen in October CPI to 4.87% was led by a favorable base effect and declining core inflation. Rising food prices, especially for onions, are likely to cause headline inflation push past 5% in November. With non-perishables showing signs of persistence, overall food inflation is likely to remain relatively elevated, with a potential weak kharif harvest posing a risk as well. Core inflation will ease further in H2FY24, and undershoot headline inflation by ~60bps in FY24E. We see FY24E inflation at 5.2% (RBI: 5.4%), with the RBI likely to keep rates ahead on hold, and not precede the Fed in any policy reversal in CY24.

Headline CPI falls to 4.87%, led by favorable base effect and falling core inflation

CPI inflation fell to 4.87% YoY in October (Emkay: 4.80%; Consensus: 4.80%; prior: 5.02%), led by a favorable base effect and falling core inflation. However, there was a sequential increase in headline inflation (0.7% MoM) for the first time in three months. Food inflation (1.1% MoM) stayed flat at 6.6% YoY, with prices of vegetables (3.4% MoM, 2.7% YoY) rising on the back of higher onion prices (15.5% MoM). Prices of other food commodities also swung up, with pulses (2.5% MoM, 18.8% YoY), spices (1.0% MoM, 22.8% YoY), sugar (1.1% MoM, 5.5% YoY), cereals (0.8% MoM, 10.7% YoY) and fruit (0.7% MoM, 9.3% YoY) leading the way. Prices of oils & fats (-0.8% MoM, -13.7% YoY) declined sequentially, while milk prices (0.2% MoM, 6.4% YoY) continued to rise at a subdued pace, ahead of the new ‘flush’ season. Prices of eggs (3.4% MoM, 9.3% YoY) rose faster than those of meat & fish (0.0% MoM, 3.3% YoY). Energy inflation saw a modest increase (0.3% MoM, -0.4% YoY).

Demand-driven core inflation continues to decline

Core inflation (ex-food, fuel, intoxicants) declined to 4.3% YoY (prior: 4.6%), helped by a favorable base effect, while sequential momentum was positive (0.4% MoM vs. 0.0% prior). This is the lowest print since Mar-20, and continues the downward trend seen since the start of 2023. Momentum was led by clothing & footwear (0.4% vs 0.3% prior), housing (0.9% vs -0.1% prior), health (0.5% vs 0.3% prior) and HH goods and services (0.2% vs 0.1% prior), while education (0.0% vs 0.3% prior), personal care (0.1% vs 0.2% prior), recreation (0.2% vs 0.2% prior) and transport & communication (0.1% vs 0.1% prior) saw slower momentum. We expect core inflation to continue moderating and clock an average of ~4.1% for the next few months (FY24E: 4.6%).

Higher Sep-23 IIP on favorable base; weak sequential momentum

Sep IIP was weaker than expected, rising 5.8% YoY (Emkay: 8.0%; Consensus: 7.0%; prior: 10.3%), largely due to a low base. Sequential momentum was weak, with all sectors apart from capital goods and consumer durables seeing negative growth. Manufacturing output rose 4.5% YoY, with healthy growth in computer & electronic products and wood products offsetting the decline in refined petroleum and food products. Electricity rose 9.9%, while mining activity was up 11.5%. In use-based sectors, all sub-sectors saw positive growth.

Headline CPI to go past 5% in November, but the RBI to stay put

We are currently tracking November inflation at 5.2-5.3% due to higher food prices. November, thus far, has seen prices of onions continually rising at a significant pace, with sustained increase for pulses as well. Food inflation is exhibiting a worrying trend, with sustained inflation for non-perishables (pulses, cereals, spices) keeping overall inflation elevated, along with transient-but-frequent price spikes for perishables. 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 October, it will likely undershoot headline by ~60bps 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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