`Nov retail inflation down, RBI’s repo rate hike in Feb could be modest’

With core inflation continuing to be high, credit rating agencies like Acuite Ratings & Research and CARE Ratings do not expect any significant downtrend in the retail inflation for the next few months.

“It is a pleasant surprise to see the headline CPI inflation print at 5.88 per cent in Nov-22 from 6.77 per cent in Oct-22 since most market participants estimated it to be above 6.0 per cent. This is an 11-month low figure and is clearly driven by the faster-than-expected decline in food inflation which stood at 5.1 per cent in the previous month,” Suman Chowdhury, Chief Analytical Officer said.

According to Chowdhury, the fall in retail inflation has been due to the quick drop in vegetable prices which is a seasonal phenomenon apart from the continuing softness in edible oil prices.

“Nevertheless, the core inflation figure remains high for RBI’s comfort and has in fact moved up further to 6.29 per cent in November 2022 from 6.23 per cent in October 2022; on an MoM basis, the core inflation went up by 0.43 per cent, highlighting the embedded nature of the current inflationary environment,” Chowdhury said.

The moderately healthy, if not strong, momentum in domestic demand is leading to the holding up of the core inflation.

Also, the base factor was relatively an advantage for the Nov-22 print which may not be the case for Dec-22. Therefore, we don’t expect any significant trend downward for the CPI inflation for the next few months, Chowdhury said.

“Given the core inflation trajectory, we continue to forecast an average figure of 6.7 per cent for CPI inflation in FY23. We also continue to expect another round of modest hike in Feb-23 which will take the terminal rate to 6.5 per cent or higher,” Chowdhury said.

According to CARE Ratings, though the inflationary pressures are on a declining trend, the war against inflation is still not over.

The moderation in food inflation is comforting, but it is mostly led by vegetables which are susceptible to weather fluctuations.

Cereals and milk inflation, the top two contributors to food inflation, are still elevated and on an upward trend, CARE Ratings said.

In this context, better Rabi acreage in the current season is a comforting factor. The strengthening of services inflation has led to sticky core price pressures despite easing of goods inflation.

Taking cue from the recent data, the RBI will remain cautious to prevent inflationary expectations from spiralling upwards.

“After the lower CPI inflation for Nov’22, we have revised down our estimates for the remaining months of this fiscal. We believe CPI inflation will remain at 6.5 per cent-6.7 per cent for Dec’22 and Jan’22, ” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI).

“Thereafter inflation will decline materially, coming down to 5 per cent by Mar’23. For Q1 FY24 we expect an average CPI of 4.4 per cent. We now mainta in a minimal probability of a February terminal 25 bps (repo) rate hike.”

However, with disappointing data from the Manufacturing sector, the Central Banks’ decision to go for another rate hike in the February meeting will be a close call, CARE Ratings said.

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