The November CPI Surprise, Creates a Difficult Monetary Policy Dilemma

19 Dec 2022

In November, India's headline CPI was down to 5.88% YY as against the consensus of 6.4%. The fall in inflation is largely attributed to a fall in vegetable prices. The core inflation broadly remained stable at 6% YY. Citi analysts revised the 3QFY23 and 4QFY23 headline inflation forecasts to 6.2% YY (vs. 6.6% earlier) and 5.6% YY (vs. 5.9% earlier). Given the disappointing the IP no at (-4%) YOY in Oct’22, MPC may be forced to review the growth-inflation trade off, in our base case we expect 25 BPS hike in Feb 2023, with neutral stance.

• 1. CPI headline inflation falls below 6% after 10 months: In the largest downside surprise in last two years the headline inflation fell to 5.8% YY vs consensus of 6.4%. Out of 50 BPS downside fall,40 BPS can be attributed to fall in vegetable prices. Food & beverages inflation fall of 200 BPS to 5.1%. YY , however core inflation is broadly unchanged at 6% YY.



• 2. Inflation in other food items remains elevated: Inflation in the CPI Food (ex Vegetables) increased significantly by 50bps to 7.5%YY in Nov-22. Cereals, milk, and edible oil are just a few of the categories where the increase is noticeable. Additionally, within cereals, the MoM increase in the price of wheat and rice was significantly larger than the typical trend for November.



• 3. Mixed trends in core inflation: Core CPI inflation remains elevated at 6% YTD. Most CPI sub-components show above trend increase in Nov-22, Citi’s CPI diffusion index indicates that inflation rose in 57% of CPI basket. The core inflation (ex-transport & gold) remained unchanged at 6.3% YY in Nov-22.


• 4. Revise down FY23 CPI inflation forecast: Citi analysts revised the 3QFY23 and 4QFY23 headline inflation forecasts to 6.2% YY (vs. 6.6% earlier) and 5.6% YY (vs. 5.9% earlier). Because of the downward revision in our oil price forecast, we revise our average headline inflation for FY 24 marginally lower to 4.9% y/y (vs. 5.0% earlier).



• 5. RBI’s Dilemma - To respond to core or headline inflation? The key question is whether the MPC will continue to emphasize sticky core inflation or pause to assess the impact of already front-loaded rises. In our base case, we continue to expect another 25 bps raise in February 2023, but with a likely shift to neutral. This will allow the MPC to take a break after February and be more flexible in its upcoming policy choices.

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