CPI Inflation Dips To 5.02%; Well Within MPC's Inflation Target Band

In September, India's retail inflation decreased from 6.83 per cent in August to 5.02 per cent, thereby breaking a two-month streak above the Reserve Bank of India's (RBI) tolerance threshold. The increase in food prices also saw a reduction, dropping from nearly 10 per cent to 6.6 per cent.

During the recent MPC meeting, the annual CPI inflation for FY24 was projected to be 5.4 per cent. The CPI Inflation Dips To 5.02 per cent, Well Within MPC's Inflation Target Band The data released by the National Statistical Office (NSO) on Thursday affirmed an average pace of 6.43 per cent. For the current quarter, the MPC anticipates an average inflation rate of 5.6 per cent, and for the entire year of 2023-24, an average rate of 5.4 per cent. This cooling in inflation rates comes as a relief to the MPC, as the estimated inflation for Q2 FY24 was 5.6 per cent, and data released by MoSPI projected it to be 5.02 per cent from August to September.

Out of the 22 States for which the NSO provides inflation rates, 13 recorded a higher price rise than the headline figure of 5.02 per cent. Among them, Rajasthan and Haryana experienced the steepest inflation at 6.5 per cent. Chhattisgarh reported the lowest inflation at 1.98 per cent, while eight other States, including Tamil Nadu (4.5 per cent), Madhya Pradesh and West Bengal (3.7 per cent each), and Kerala (4.7 per cent), registered inflation below the 5 per cent mark.

The decline was influenced by base effects, the reduction in LPG rates, and a moderation in vegetable prices. However, prices for pulses, fruits, and eggs saw a further surge. Consequently, this month's retail inflation falls well within MPC's inflation targeting band.

What is Inflation Targeting?

Inflation targeting is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. The inflation target is defined as a medium-term average rather than as a rate (or band of rates) that must be always held. The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.

India’s Inflation Targeting Framework

In 2016, the Reserve Bank of India Act, 1934, was amended to provide a statutory basis for the implementation of a flexible inflation-targeting framework, where the Centre and the RBI would review and agree upon a specific inflation target. Under this, 4 per cent was set as the Consumer Price Index (CPI) inflation target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent. MPC being accountable for failure to establish and achieve the nominal anchor. The failure defined as the inability to achieve the target of 4 per cent (+/- 2 per cent) for 3 successive quarters. Such failure requires MPC to issue a public statement.

Reasons behind cooling of Inflation in September

The LPG cylinder price cuts unveiled by the Centre last month pushed the year-on-year inflation in fuel and light prices for households from 4.3 per cent in August to -0.1 per cent in September. Base effects from September 2022, when consumer prices rose 7.4 per cent, also helped ease the inflation rate, which was lower than economists’ expectations, but almost in line with the central bank’s Monetary Policy Committee’s (MPC) projections. On a month-on-month basis, food prices fell 2.2 per cent in September, while overall consumer price levels dropped 1.1 per cent. Milk inflation eased slightly from 7.7 per cent in August to 6.9 per cent in September, but some other key protein sources such as eggs (6.4 per cent), meat and fish (4.11 per cent) clocked higher inflation last month.

"The CPI inflation moderated appreciably to a three-month low 5.0 per cent in September 2023, lower than our forecast of 5.5 per cent, offering considerable relief. While the sequential moderation was broad-based, the food and beverages and the fuel and light segments witnessed a sizable decline in their inflation prints, with the latter in particular leading to the lower-than-expected reading in the month," said Aditi Nayar, Chief Economist, Head - Research and Outreach, ICRA Ltd.

Additionally, the core-CPI (CPI excl. food and beverages, fuel and light and petrol and diesel for vehicles) inflation dipped to 4.7 per cent in September 2023, the lowest since February 2020. The IIP print for August 2023, at a 14-month high of 10.4 per cent, exceeded our forecast of 9.3 per cent for that month, with three of the six used-based categories witnessing a double-digit expansion in the month.

"Looking ahead, a shift in the festival calendar may provide an optical boost to the growth of certain categories within the IIP in the months of September and November 2023, with a concomitant moderation in the prints for October 2023. Given the MPC’s CPI inflation projections for Q1 FY25 and the derived forward-looking real policy rate, we maintain our expectations of an extended pause until the beginning of a shallow rate cut cycle of ~50-75 bps in August 2024," Nayar concluded.

“The recent developments in retail inflation and industrial production paint a promising picture of India's economic landscape. The decline in inflation, coupled with robust industrial growth, not only aligns with the Reserve Bank's comfort zone but also injects confidence into our markets. This welcomed respite in inflation enhances purchasing power, a timely boon as the festive season begins, instilling greater assurance in consumer choices," said Somdutta Singh, Founder & CEO, Assiduus Global Inc.

"Headline inflation came in at 5 per cent YoY, lower than the market forecast of 5.4 per cent and our expectation of 5.7 per cent. This is exactly what the RBI has projected in its recent monetary policy. CPI ex-veggies was also eased to 5.2 per cent YoY, from 5.4 per cent each in the previous two months. Core inflation also moderated to a 46-month low of 4.6 per cent, from 4.9 per cent in August 2023," said Nikhil Gupta, Chief Economist, MOFSL.

Inflation in fuel & light declined 3.9 per cent MoM, marking the highest fall on record. Also, IIP grew 10.4 per cent YoY in August 2023, better than the market consensus of 9 per cent (our forecast of 9.1 per cent).

"We expect core inflation to ease gradually towards 4 per cent by March 2024 though the headline inflation may stay 4.5-5 per cent. With another 5 per cent MoM fall in veggies in October 2023, headline inflation could be ~4.5 per cent. IIP to remain strong over the next few months," Gupta highlighted.