The November 2021 Consumer Price Index (CPI) data was released, it showed that retail inflation was at a three-month high of 4.9 per cent.
Though it is high, it is well within the Reserve Bank of India target of 2-6 per cent for the fifth straight month. This rise came despite both state and central governments reducing taxes on petrol and diesel. A major cause of concern was that the core inflation was 6.2 per cent in November 2021. Similarly, the wholesale prices inflation reached a new twelve-year high of 14.23 per cent in November mainly due to a surge in primary food inflation and also a rise in fuel and power, as well as oil and gas prices.
“The November CPI inflation at 4.91 per cent, below most estimates, but core inflation above 6 per cent is a cause of concern. The retail inflation has inched up for the past three months but stayed below the 5 per cent mark. The rise in inflation has been primarily due to food and vegetables for the non-seasonal rains. The cool-off in food and crude prices is likely to result in lower inflation in the months to come. The inflation may be on an upward curve, but largely below the central bank's range, which will help keep the current low-interest-rate regime for at least 1-2 quarters unless there is a sharp rise in CPI,” remarked Nish Bhatt, Founder and CEO, Millwood Kane International.
Experts believe that while the CPI inflation level at 4.91 per cent is within the central bank’s target range, it is still on the higher side of the band and has trended higher for the second straight month.
“Fuel and transport costs remained the main constituents that pushed the level higher in this reading. These categories exert cost pressure on various input items. However, the extent to which increased costs are passed on to consumers will depend on the strength of demand in respective product categories. Although not a concern at present, elevated price levels will discomfort consumers when demand levels improve. Considering the high inflationary expectations, RBI will be watchful of the inflation level, and we hope that benign interest rates continue considering capital intensive sectors like real estate are strongly influenced by credit costs at both consumer and developer level,” said Vivek Rathi, Director Research, Knight Frank India.
A few experts believe that core inflation will continue to stay high but things will stabilize over the next few months. “Overall, while the headline inflation (a measure of the total inflation within an economy) was lower than expected, it doesn't change anything materially. We expect it to touch 6 per cent by January 2022. Core inflation though is likely to stay at 6 per cent. Accordingly, the explicit normalization of the monetary policy will likely begin in Feb'22, with a 15bps hike in reverse repo rate,” said Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services Ltd.
Regarding the WPI numbers, which hit a record high of 14.23 per cent in November, this rise was mainly caused by the increase in manufacturing and food prices. Though experts feel that it will range between 11 to 12 per cent over the next few months, the gap between retail and wholesale price-based inflation has widened over the past few months. Interestingly the WPI inflation has remained in double digits for the last few months in a row while headline retail inflation is hovering near 5 per cent and within the central bank's target of 2 to 6 per cent.
There are concerns that despite a decline in global crude oil prices and the cut in fuel prices, companies are trying to pass on the rising costs on the consumers as there has been a rise in domestic demand. A report from Motilal Oswal says that the WPI numbers were higher than their forecast of 11.8 per cent YoY and Bloomberg survey of 11.98 per cent YoY. The report says that with this the WPI inflation during Apr-Nov’21 stood at 12.2 per cent YoY as against a deflation of 0.2 per cent YoY during Apr-Nov’2020. The WPI inflation in ‘primary articles’ came in at a nearly two-year high of 10.3 per cent YoY as against 5.2 per cent YoY a month ago. The report observes that within primary articles, food articles inflation shot up to 4.9 per cent YoY in Nov’21 after three consecutive months of deflation which drove overall high WPI food inflation to 6.7 per cent YoY in Nov’21 as compared to 3.1 per cent YoY in Oct '21. The report says that the inflation in manufactured food items reduced to 10.3 per cent YoY in November 2021 as against 12.7 per cent YoY in Oct 2021.
The Motilal Oswal report mentions that the ‘Fuel and power’ WPI inflation continued rising and stood at 39.8 per cent YoY in Nov 2021 versus 37.2 per cent YoY in Oct 2021. The WPI inflation in ‘manufactured products’ however, came in slightly lower at 11.9 per cent YoY in Nov '21 as against 12 per cent YoY in Oct’21. On the other hand, the report observes that the WPI core inflation (non-food manufactured products) also rose to 12.2 per cent YoY in November.
Experts from Motilal Oswal expect a reverse repo rate hike of 15 basis points at the next monetary policy meeting in February 2022.
