An Inline August CPI Inflation likely to Temper RBI Stance

22 Sep 2022

India Headline CPI rose by 29bps to 7.0%YY in Aug-22, largely led by uptick in CPI Food & Bev. ex vegetable. With increasing divergence within the food basket evidenced by subdued vegetables prices and elevated cereals prices, August witnessed the sharpest MoM jump in rice and wheat prices (since 2014). Citi analysts retain CPI forecast of 6.7% FY23 for average and expect 4QFY23 inflation at ~5.9%YY. With CPI prints largely in line with RBI forecast, they believe the central bank may temper the pace of policy normalization in September by opting for a 35bps rate hike coupled with no change in MPC stance.

Key Highlights:

• 1. August Inflation in line with Estimates: The Headline CPI inflation rose to 7.0%YY in Aug-22 broadly in line with Citi estimate of 6.95% and consensus of 6.90%. This uptick is largely driven by CPI Food & Bev. ex vegetable inflation. The Core CPI inflation remained stable at ~5.8%YY in Aug-22.



• 2. Food inflation – divergence between vegetable and cereals & pulses: Vegetable CPI rose by 2.47%MoM in Aug-22 against usual August trend of 3.9%.August also witnessed a sharp jump in the prices of key cereals owing to Monsoon-related supply disruption. Cereal prices remain the key upside risk to inflation in 2HFY23. Pulses prices came under pressure from risk of supply disruption. CPI Pulses rose by 1.7%MoM in Aug-22 against usual August trend of 0.8%.



• 3. Core inflation momentum stabilizing: Citi analysts observe that Core CPI inflation momentum is stabilizing with declining trend in contact-based services. Core CPI ex Transport & Gold remained unchanged in Aug-22 at ~0.45%MoM with CPI Housing inflation is not showing any signs of upward pressure.

Summary: The growth-inflation backdrop may likely lead the RBI to temper the pace of the aggressive normalization might opt for a 35bps repo rate hike with a change in MPC stance unlikely in Sep MPC.

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