Kolkata: CPI eased a tad to 6.4% YoY in February (+0.2% MoM) from 6.5% YoY in January (+0.5% MoM) led by modest decline in food prices, according to Indranil Pan, Chief Economist, Yes Bank.
Nevertheless, two successive 6% plus headline inflation print is unlikely to provide comfort to the RBI. To add, core inflation remains sticky at 6.2% with housing rentals defying seasonal moderation. With domestic inflation above the 6% handle, we see the RBI to hike by 25 bps in April 2023. Domestic data prints alongside Fed’s actions considering the recent US banking sector woes will likely determine the course of future hikes, he said.
Food inflation declined by 0.1% MoM in February driven by the decline in vegetable (-2.5% MoM), meat & fish (-1.6% MoM) and pulses prices (-0.3% MoM). The sequential momentum in cereal prices was at 0.8%, after six months of >1% reading, Pan said.
Within cereals, the pace of increase in wheat prices moderated to 0.8% MoM from 2.9% MoM in January, likely on account of the open market sale of wheat carried out by FCI. Milk prices increased by 0.9% MoM reflecting rising fodder costs, he said.
Pan said Egg prices declined sharply by 6% MoM, whereas pulses and oils & fats prices declined by 0.3% MoM and 1.7% MoM, respectively. Spices prices increased by 0.5% MoM, the slowest sequential increase seen in the last 14 months. On YoY basis, food inflation increased by 6.3% in February (January: 6.2% YoY).
On a sequential basis, consolidated inflation picked up by 0.1%. Petrol prices registered a flat growth and diesel prices increased by 0.1% MoM. Electricity prices picked up by 0.1% MoM, whereas LPG registered a flat growth, he said.
Firewood & chips and kerosene prices declined by 0.5% MoM and 5.1% MoM, respectively.
Continuing with the trend seen in last month, coal prices declined by 0.5% MoM in February.
On a YoY basis, consolidated fuel inflation increased by 7.8% YoY, Pan said.
RBI Core inflation increased by 0.5% MoM in February, the same momentum seen in January. Housing prices registered a strong momentum of 0.8% MoM. The pace of increase in clothing and footwear moderated to 0.4%. MoM, and miscellaneous components registered a growth of 0.4% MoM. Within miscellaneous components, the pace of increase in ‘Health’ (+0.6% MoM), ‘Recreation and Amusement’ (+0.2% MoM) and ‘Personal care and effects’ (+0.7% MoM) moderated, he said.
On the other hand, ‘Education’ (+0.2% MoM) and ‘Transport and Communication’ (+0.2% MoM) continue to exhibit upward trends. Household goods and services maintained the same momentum at 0.5% in February. On a YoY basis, core inflation remains sticky at 6.2%, Pan said.
A moderation in sequential momentum of Headline inflation is a positive takeaway from today’s print. Daily mandi prices for cereals are showing negative momentum in March till date along softer price movements for vegetables, and oil and fat, he said.
“Going forward, we expect the Headline CPI print to moderate, and our estimates show that Headline CPI inflation could be firmly in the sub-6% zone through FY24, even as the 4% target could remain elusive. RBI’s focus lately has shifted on core inflation, and this metric continues to remain sticky at 6.2% with internals like housing rentals, household goods and services, education and health maintaining strong growth on MoM basis. This clearly indicates that the expected dis-inflation expected after the 250bps hike in the repo rate by the RBI has yet not taken shape. Increase in international gold prices along with INR depreciation pressure is playing truant with the retail gold price rise ranging between 1.5%-4.0% MoM over the last four months,” Pan said.
He said CPI core core measure (ex. gold, silver and other ornaments) at 6.10% YoY is moderating at a faster clip than RBI core inflation at 6.23%. Overall, our model indicates that core inflation – ex fuel and light and pan/tobacco is likely to average at around 5.3% in FY24 from 6.3% in FY23.
Given that retail inflation remains higher than the threshold 6% for the last two months, it might not be possible for RBI to pause immediately. Further, our model indicates that the 4-quarter ahead inflation is expected at 5.6%, thereby implying a 90bps positive real rate for now, Pan said.
The RBI governor had indicated during the last meeting that the real rates are still lower than the pre- pandemic levels. Thus, we continue with our earlier call of a 25bps increase in the repo rate in April. As of now, we think that the recent developments in the US banking system is unlikely to lead to any snowballing effect on the global financial and banking systems. The US CPI print tomorrow along with the US Fed’s rate actions on 22 March, 2023 (and any further developments for the US banking system) will also be critical inputs for the RBI, Pan added.
