NOV 24 INFLATION

 

1. CPI Inflation for November 2024 Trends Higher at 5.5%

The Consumer Price Index (CPI) inflation for November 2024 came in at 5.5%, marginally lower than market estimates of 5.6%. This decline was supported by the cooling of food and beverage prices. However, vegetable prices rose by 29.3% in November compared to a sharper increase of 42.2% in October.

Other key movements in food prices include:

• Fruits: Prices increased by 7.7% in November, slowing from 8.4% in October.

• Edible Oils: Prices rose at a faster pace of 13.28% in November compared to 9.6% in October, signaling a concern.

Core inflation remained stable at 3.6% in November, compared to 3.7% in October, driven by continued deflation in oil and gas prices. The decline in oil and gas inflation is largely attributed to the LPG price cuts announced last year.

2. Spice Prices Decline for the Fifth Consecutive Month

Spice prices fell for the fifth straight month on a year-on-year basis, albeit at an increased pace. Prices declined by 7.4% in November compared to 7.0% in October. This drop is primarily due to:

• Increased domestic supply following bans imposed by Hong Kong and Singapore on Indian spices over the presence of ETO (ethylene oxide).

Additionally, the delayed onset of winter has impacted the sowing of potatoes and mustard crops. Notably, CPI excluding food and beverages (F&B) remained flat compared to the previous month.

3. Contribution of Food Inflation Declines

The contribution of food inflation to overall inflation decreased to 69% in November, compared to 72% in October. However, the 12-month average contribution of food inflation remains steady at 70%.

4. Personal Care and Other Categories

Inflation in Personal Care & Effects remained stable at 4.7%, aligning with the year-to-date (YTD) average for October 2024. Other components showing marginal upticks include:

• Education: 4.5% in November (vs. 4.0% in October)

• Recreation: 4.5% (vs. 2.5%)

• Household Goods & Services: 4.8% (vs. 4.7%)

Notably, almost all major categories saw average annual YTD inflation inching upward after the November inflation print. The YTD inflation for FY25 now stands at 4.9%.

5. Rural Inflation Continues to Outpace Urban Inflation

Rural inflation remains higher at 5.95% YoY compared to urban inflation at 4.83%, marking the 16th consecutive month of this trend. Food inflation for both rural and urban areas is rising at a near-identical pace of 9.7% and 9.8%, respectively.

A point worth noting is that rising wages do not appear to be significantly exacerbating price increases. Over the past four years, Indian corporates maintained an average EBITDA margin of 22%, while the average wage bill grew by approximately 12%, reflecting moderation in wage expenses and margin stability.

6. Outlook

a. Impact of Extreme Weather on Food Prices: Extreme weather conditions have reduced the per capita availability of vegetables and fruits to 7 kg and 12 kg, respectively, over the last decade (Source: SBI Research). Multiple climate shocks, including recurring cold and heat waves, have consistently pushed food inflation higher. Early indications from food prices in December suggest inflation is likely to remain at ~5.5% for the month, exacerbated by festive and year-end demand.

b. Monetary Policy Outlook: The next Monetary Policy Committee (MPC) meeting will be the first under the new Governor, with both growth and inflation dynamics playing a key role in decision-making. While two MPC members previously voted for a repo rate cut, we now anticipate the following:

• A 50 bps reduction in repo rate starting February 2025, possibly preceded by a cut in the Cash Reserve Ratio (CRR).

• However, a slower deceleration in vegetable prices in December could introduce upward bias to the inflation print.

c. Revised Rate Cut Expectations: Last month, expectations pointed to a potential rate cut beginning in February 2025. However, we now see a remote possibility of any rate cut in the February MPC meeting. Our base case scenario assumes a rate cut no earlier than April 2025, owing to expectations of a prolonged higher inflation regime. As per RBI’s revised estimates, inflation is projected to reach 4% only by Q2 FY26.