Asia/Pacific March 13, 2023 / 07:27 am UTC

India preview: due March 13 – Feb CPI: India Inflation High Prices To Burn Pockets

By Sanya Suri

India’s CPI inflation in February is expected to have trended downward to 6.3% y/y, down from 6.5% y/y in January. The moderation will mainly be on account of dipping food prices, indicating that core inflation will continue to prove to be sticky. This reaffirms the Reserve Bank of India’s view that there continues to be a need for calibrated monetary tightening to ensure that inflation expectations are anchored and price volatility does not eat into disposable income and demand. 

Figure 1: India CPI Inflation (% change, y/y)

After trending above the 6% upper target range for 10 consecutive months in 2022, headline inflation had returned to within range levels in November. However, the trend was reversed again last month as food prices soared. Persisting with its hawkish bent, the Reserve Bank of India (RBI) had raised its benchmark policy rate in its January MPC by 25bps to 6.5%. However, the central bank was of the view that price pressures had already begun to ease and were likely to moderate further by mid-2023. The expectations of above 6% y/y inflation in January and February will stoke worry for the RBI now. With the INR’s volatility continuing, imported inflation also remains a concern and will contribute towards elevated headline inflation. Further, it appears from the RBI’s minutes that core inflation remains elevated, and this is likely to eat into the public’s disposable income and threaten demand. Declining output of consumer durables (consumer durables output contracted by 7.5% y/y in January) is indicative of consumer spending turning cautious. 

Risks to India’s inflation remain high in the near term. This includes supply shocks, global commodity price surge, China re-opening and the seasonal nature of food prices. Additionally, the risk of a lower-than-expected harvest owing to climate change concerns affecting food prices cannot be ruled out. This is particularly heightened now that there is an increased expectation of the El Nino this year, and the early arrival of summer in Northern India. Following these dynamics, we expect inflation to moderate only slightly to 6.3% y/y in February, but remain above the 6% upper target range, increasing the risk of the RBI hiking its interest rate further. One additional rate hike of 25bps in April cannot be ruled out. 

4Cast Ltd. and all of its affiliates (Continuum Economics) do not conduct “investment research” as defined in the FCA Conduct of Business Sourcebook (COBS) section 12 nor do they provide “advice about securities” as defined in the Regulation of Investment Advisors by the U.S. SEC. Continuum Economics is not regulated by the SEC or by the FCA or by any other regulatory body. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Continuum Economics has an internal policy that prohibits “front-running” and that is designed to minimize the risk of receiving or misusing confidential or potentially material non-public information. The views and conclusions expressed here may be changed without notice. Continuum Economics, its partners and employees make no representation about the completeness or accuracy of the data, calculations, information or opinions contained in this report. This report may not be copied, redistributed or reproduced in part or whole without Continuum Economics’s express permission. Information contained in this report or relied upon in its construction may previously have been disclosed under a consulting agreement with one or more clients. The prices of securities referred to in the report may rise or fall and past performance and forecasts should not be treated as a reliable indicator of future performance or results. This report is not directed to you if Continuum Economics is barred from doing so in your jurisdiction. Nor is it an offer or solicitation to buy or sell securities or to enter into any investment transaction or use any investment service.
Analyst Declaration
I, Sanya Suri, the lead analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.