CPI Inflation Remains Below Target For The Third Consecutive Month In October

From vegetable to sugar and pulses, prices of key food items in India continue to run well below last year, keeping retail inflation below the central bank’s target for the third straight month.

Inflation as measured by the Consumer Price Index stood at 3.31 percent in October compared to 3.70 percent in September, showed government data released on Monday. A poll of Bloomberg analysts had forecast CPI at 3.6 percent.

At current levels, inflation remains below the mid-point of the 4 (+/-2) percent inflation target given to India’s Monetary Policy Committee. The committee kept the benchmark repo rates unchanged in October, after raising it by 50 basis points in two tranches in the first half of the current financial year.

Inflation Internals

Modest food inflation continues to be reason for lower than expected retail inflation. Core inflation, however, rose above 6 percent in October.

Within the basket of food items, vegetable, sugar and pulses continue to show negative year-on-year price changes. On a month-on-month basis too, the three categories have either show a flat trend or have seen index levels decline, suggesting a mismatch between demand and supply.

• CPI food inflation fell 0.86 percent over last year in October, compared to an increase of 0.51 percent in September.
• Fuel and light inflation stood at 8.55 percent in October versus 8.47 percent in September.
• Housing inflation eased to 6.55 percent compared to 7.07 percent in September.
• Clothing and footwear inflation was at 3.55 percent versus 4.64 percent in September.
• Inflation in the households goods and services segment jumped to 6.06 percent in October after clocking 4.88 percent in September.
• Inflation in the transport and communication segment also came in higher at 7.72 percent in October over 6.42 percent the previous month.
• Core inflation, overall, was at 6.1 percent.

Rural Inflation Slides

The inflation data also showed that rural inflation is falling faster than urban inflation, which could point to weakness in rural demand. Rural inflation fell sharply to 2.82 percent compared to 3.27 percent in the previous month.

In a report dated Oct. 30, Nomura Global Market Research had pointed to other indicators pointing to a rural demand slowdown. “The traditional bellwethers of rural consumption – two-wheeler and tractor sales have moderated to ~5 percent y-o-y in Q3 from 16-25 percent in Q2,” Nomura economists had said.

Soumya Kanti Ghosh, group chief economic adviser at SBI, said lower food inflation is a negative as it suggests that not enough procurement of crops is happening at the minimum support prices. “Such a trend goes against simple economics of MSP driving food inflation and declining trend is showing that there has been very little procurement happening on the ground,” he wrote in a statement. “This is indeed a matter of serious concern.”

B Prasanna, head of global market at ICICI Bank, said that a continued fall in food prices could aggravate distress in the agriculture sector. “We are concerned at the extreme food disinflation,” he said in an emailed comment. “We expect FY2019 headline inflation to remain very benign given the recent downturn in oil prices, stability in the rupee and mild inflation prints.”

With inflation remaining below estimates, oil prices cooling and the currency stabilizing, India’s Monetary Policy Committee may choose to maintain a status quo on rates at its December meeting, said Nayar of ICRA.