India’s benchmark inflation rate, as measured by Consumer Price Index (CPI), stood at 4.87% in the month of October, the lowest this number has been since June. The short-term spike and subsequent moderation in this number – it jumped to 7.4% in July and has fallen every month since – is essentially the reflection of fall in vegetable price inflation.
While a moderation in the headline inflation number, and more importantly, core inflation number – the latter measures the non-food, non-fuel component of CPI – will bring a lot of comfort to both the Reserve Bank of India (RBI) and the government, prices of some essential commodities continue to rise at an uncomfortable pace. This, economists believe, will continue to force the government into aggressive supply-side measures to control inflation, potentially generating headwinds for rural demand.
The October CPI print makes it the third consecutive month of decline in the headline inflation number after a spike in vegetable inflation pushed it to 7.4% in July from a June print of 4.87%. A disaggregated analysis of the inflation numbers shows that the story of spike and subsequent moderation is the story of a rise and fall in food, especially vegetable inflation numbers.
Food inflation, which accounts for 39% of the CPI basket, jumped to 11.5% in July from just 4.6% in June. This was basically a result of a sharp jump in vegetable inflation, which went from a contraction of 0.7% in June, to a growth of 37.4% in July. With vegetable inflation moderating to 26.1%, 3.4% and 2.7% in August, September and October respectively, food inflation slowed to 9.9%, 6.6% and 6.7% in these three months despite pulses inflation increasing from 10.6% in June to 16.4% in October. Among other components of the food basket, edible oil prices continue to fall, cereal inflation is decelerating but still in double digits, and sugar prices have been gaining momentum with the number increasing to 5.5% in October from just 1% in March 2023.
Other components of the CPI basket are well under control. Clothing and footwear, housing and miscellaneous (this includes services) grew at moderate levels of 4.3%, 3.8% and 4.4%, while fuel and power had a contraction of 0.4% – perhaps a reflection of the reduction in cooking gas prices by the government. Data from the Centre for Monitoring Indian Economy (CMIE) shows that core inflation came in at 4.3% in October 2023, the lowest this number has been since March 2020, when it was 3.8%.
RBI’s Monetary Policy Committee, in its October resolution, projected an inflation of 5.4% in 2023-24 with the December and March quarter numbers being 5.6% and 5.2%. These projections, when read with Governor’s statement about the 4% inflation target being sacrosanct, would have meant that the headline inflation number not coming down would have put pressure on RBI to walk its hawkish talk. Any further hike in interest rates – they have already increased by 2.5 percentage points in the current rate hike cycle – would have generated headwinds to growth, and a rise in debt servicing costs for both households and firms.
To be sure, economists believe that persistence of elevated inflation levels in critical commodities such as cereals, pulses and sugar will force the government to adopt aggressive supply-side management which will put a squeeze on farm earnings and hence rural demand.
“So far, India’s growth has remained resilient in the face of slowing global growth and volatile oil prices. But this has been led more by urban India than by rural India. On the other hand, rural demand growth is more subdued, as seen from indicators such as railway travel, tractor sales and seasonally adjusted demand for NREGA works. And this may signal a multi-year phenomenon. Led by climate change (which is making domestic crop production more uncertain) and more efficient food imports (to keep a lid on prices), rural incomes have been on the back foot,” HSBC chief India economist Pranjul Bhandari and Aayushi Chaudhary said in a research note on November 10.