CPI moderates to 5.1% on lower food inflation

Consumer price index (CPI)-based inflation marginally slowed to 5.1% in January from 5.2% in December, mildly pulling back the northward trajectory seen since July 2017. A 30 basis points (bps) fall in food inflation on-month, aided by a 60 bps decline in fuel inflation, brought overall CPI inflation lower. Inflation, however, continued to firm up in large parts of the services sectors such as housing (driven by the revision in house rent allowance payments), education and in recreation, amusement and personal care and effects (reflective of both, return of pent up demand in the economy and impact of higher taxes on services due to goods and service tax implementation). Yet, core inflation, stayed broadly unchanged from the previous month, at around 5.1% in January.

Despite the recent rise in core inflation, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) refrained from raising the policy repo rate in its meeting on February 7 since it believes that the economy’s recovery is nascent and requires nurturing. Also, several factors driving the uptick in inflation (return of pent up demand and impact of goods and services tax, or GST on services prices) are expected to smoothen off over time.

For fiscal 2018, CRISIL expects CPI inflation to come below 4% average and rise to 4.6% in fiscal 2019. The pick-up will be due to rising consumption demand, impact of house rent allowance revisions on housing inflation, and higher global crude oil prices. The risk of fiscal slippage and higher MSP can also translate into upside risks to inflation. Food inflation is likely to stay benign given a normal monsoon. As per the MPC, inflation is expected to rise in the first half of fiscal 2019 but moderate significantly in the second half. In light of this, CRISIL expects the repo rate to remain unchanged over the next six months unless significant upside risks to the MPC’s inflation forecast materialise.

So far, inflation has stayed within the projected trajectory despite an upside from the prices of oil, fruits and vegetables, and higher housing inflation. Yet, inflationary risks could mount if risks materialise. First, higher minimum support prices (MSP) as well as increase in coverage of procured crops as per these MSPs could flare up prices of certain crops and exert an influence on food inflation. Second, firmer input costs can push manufacturers to raise prices in a scenario of stronger demand. On the downside, items of mass consumption could see softer prices if the latest downward revision in the GST rates on some items is passed on to consumers. The interplay among factors will therefore determine the pressures on inflation.