India's inflation eases: Impact on future rate hikes

India's Inflation Scenario

India's retail inflation number is measured by the Consumer Price Index (CPI). It was released yesterday. Let us look at all the numbers and what we can expect in the future.

India's CPI inflation

India's CPI eased to an 11-month low in November and stood at 5.88%. Sequentially (MoM), it was down from 6.77% in October. For November, analysts had predicted annual inflation at 6.40%, so the inflation number is below the estimates.

Also, it is the lowest level since December 2021 and the first month in 2022 when retail inflation was below the RBI's upper margin of 6%. As per the mandate to RBI, the government has said that the central bank should maintain retail inflation at 4% with a margin of 2% on either side for five years (March 2021 to March 2026).

The Consumer Food Price Index (CFPI), which tells the inflation in the food basket, has also come down in November. It stood at 4.67% compared to 7.01% in October. Below are some categories where the prices have declined:

• Vegetable prices contracted by 8.08% 
• Oils & Fats prices declined by 0.63%
• Sugar and confectionery slipped by 0.25%

Some products saw a jump in price. The list is as below:

• Spices (raw) increased by 19.52%
• Cereals and Products gained 12.96%
• Milk and Products rose by 8.16%
• Pulses and Products increased by 3.15%

Also, the fuel and light segment rose 10.62%, clothing and footwear gained 9.83%, and the housing segment inched up 4.57%.

Core inflation, or inflation excluding food and fuel items, was up roughly 10 basis points from October at 6.1%.

What are analysts saying about inflation?

Chief Economist at ICRA has said that given the pending pass-through of higher input costs by producers and sustenance of robust demand for services, core inflation is likely to remain elevated in the remainder of FY23, notwithstanding the recent correction in prices of some global commodities.

Senior Economist at Kotak Institutional Equities said they continue to see CPI inflation around 6% till February 2023 before dipping sharply to 5% in March and around 4.5% in Q1FY24. The inflation trajectory is likely to be slightly below the RBI’s latest estimate. The case for a pause in the February policy itself will strengthen, especially as the next few CPI inflation prints possibly remain below 6%.

Inflation and future rate hikes?

The lower inflation is a positive sign for investors as policymakers may not be aggressive with future rate hikes. The next MPC meeting is in February, and the next couple of months' inflation numbers will be crucial to determine where we will go with rate hikes.

As of now, most experts believe that we are towards the end of the tightening cycle. Many economists believe the final rate hike may occur in February, days after FM presents the Budget for 2023-24 on the first day of the month.