Trifecta, base effect crank up the price gauge

Consumer Price Index (CPI)-based inflation rose to a nine-month high of 5.5% in September from 3.7% in August. While a low-base effect was expected to statistically lift the gauge, three factors on the ground were at play as well.

One, fruits and vegetables, where the base effect turned adverse and the damage caused by unseasonal/excess rains led to a sequential price rise. High and volatile vegetable prices, with inflation at 36%, continue to be the sharpest pain point plaguing food inflation, which rose to 9.2%.

Two, prices of edible oils have been rising globally, with lower production from last season adding fuel to fire.

And three, costlier gold pushed up inflation in the ‘personal care’ segment of core inflation. This, in turn, hauled the core barometer to a 9-month high.

Our base case on inflation: Given that the monsoon season wound up with an 8% surplus, kharif sowing is healthy (101% of the full-season normal acreage) and the harvest will enter the market in October, food prices should start easing at least sequentially. Under this assumption, we expect CPI inflation to average 4.5% this fiscal compared with 5.4% in the last, mainly led by softer food inflation and a mild uptick in non-food inflation.

However, a sharper-than-expected rise in September inflation, particularly coming from a steep sequential rise in vegetables, is a point of worry. October data also bares a further pick-up in vegetable prices.

Last week, the Monetary Policy Committee (MPC) of the Reserve Bank of India took a step closer to cutting the repo rate by changing its stance to ‘neutral’.

Visibility on a durable decline in inflation will be the next key determinant of a rate cut. Our base case is a 25 basis points reduction in the repo rate during the MPC’s policy review meeting in December. Trouble on the food inflation front can delay this further.