Nov 12, 2021

INDIA | Oct-21 CPI

Uneasy comfort

Summary: India’s retail inflation inched up to 4.48% YoY in Oct-21 from

4.35% in Sep-21, marking an end to the moderating trend in annualized
rate of inflation seen in the last 4-months. Nevertheless, headline inflation
remaining well ensconced within the policy target band continues to
provide comfort. The month of Oct-21 saw broad based sequential price
pressures, of which food can be treated as transitory. However, core price
pressures continue to remain strong, elevated, and sticky on account of
pass-through of high input prices amidst gradual unlocking of the
economy. On balance, while we continue to believe that CPI inflation
would trend lower in FY22 from 6.2% in FY21, it is likely to be somewhat
higher at 5.6% vis-à-vis RBI’s forecast of 5.3%. As such, we continue to
expect a gradual backloaded normalization in monetary policy with focus
on liquidity calibration and restoration of width of the LAF corridor.

India’s CPI inflation inched up to 4.48% YoY in Oct-21 from 4.35% in Sep-
21, marginally higher vis-à-vis market expectations (Reuters: 4.32%;
QuantEco Research: 4.42%). It also marks an end to a moderating trend in
annualized rate of inflation seen in the last 4-months. Nevertheless,
headline inflation remaining well ensconced within the policy target band
continues to provide comfort.

Key highlights in Oct-21 data

• Sequential momentum for CPI printed at 1.41% MoM. That’s the

Chart 1: CPI inflation remains ensconced within the policy target band

Source: CEIC, QuantEco Research

 CPI: Uneasy comfort

highest jump in prices ever observed in the month of October in the

current CPI series beginning 2011 (in comparison, the average
change in October for the series stands at a moderate level of
0.69%). The annualized rate of headline inflation moving
up modestly despite the substantial momentum kicker,
highlights the role of favorable statistical base effect.
• Food inflation momentum made a comeback after remaining
subdued for three straight months. This is likely on account of
the back loaded revival in south-west monsoon (for details,
see – India Monsoon Flas Note: All’s well that ends well, Oct 1,
2021) that resulted in ~35% excess rainfall in the month of
Sep-21. Price pressures in Oct-21 were led by Vegetables (14.2%
MoM), Sugar & Confectionery (1.84% MoM), and Oils & Fats (1.33%
MoM).
• Fuel inflation momentum increased to 0.98% MoM in Oct-21 from
0.74% in Sep-21. The uptick was led by Diesel, Kerosene, Coal, LPG,
and Firewood. Having said so, we also note that annualized fuel
inflation at 14.35% is currently at a series high and is reflective of
the adverse base effect, higher domestic taxes, and the run up in
global fuel prices in the last 3-quarters.
• Sequential momentum in core (CPI ex Food & Beverages and Fuel
& Light indices) inflation moved up to 0.68% MoM in Oct-21 from
0.25% in Sep-21, thereby pushing the annualized rate of core
inflation in the vicinity of 6%. Price pressures were seen to be broad
based in Oct-21 with marked acceleration in case of Housing,
Clothing & Footwear, and the Miscellaneous sector.

Outlook
Recent inflation prints send out two important signals.
• First, CPI inflation in FY22 is likely to be somewhat higher
at 5.6% compared to RBI’s forecast of 5.3%.
• Second, on average basis, retail inflation would trend lower in
FY22 to 5.6% from 6.2% in FY21.

The biggest source of comfort emerges from food inflation

(notwithstanding the strong momentum witnessed in Oct-21). Expectation
of record high incoming kharif output, supportive soil moisture content for
upcoming rabi sowing season along with policy interventions in case of
edible oils and pulses bode well for near term food inflation trajectory. The
recently announced sizeable reduction in excise duty on diesel by the
central government (besides reduction in VAT by few states) should lower
transportation costs and further limit pressures on food inflation.

Having said so, there are reasons to be watchful of imminent price

pressures.
• The energy basket along with few other commodities has
accelerated sharply in last few months. This will continue to
keep imported inflation pressures intact. While the recent reduction
in excise duty for Diesel and Petrol by Rs 10 per litre and Rs 5 per
litre is a welcome step, the overall impact is unlikely to be significant
(at 25-30 bps) as (i) the CPI basket is petrol heavy, and (ii) other
energy items like ATF, LPG, CNG, Coal, etc., continue to face upside
pressure.
• A leg-up to demand side inflation can be expected in the near-to-
medium term. Ongoing tapering of lockdown restriction by
states along with improving vaccination coverage bringing

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 CPI: Uneasy comfort

pent-up demand and revenge spending together.

International evidence (from some of the developed and emerging
economies) so far suggests that when vaccination attains a critical
mass, then it is accompanied by rapid improvement in economic
confidence along with build-up in inflationary pressures. India has
so far inoculated ~80% of its adult population (with ~39% fully
vaccinated) with one dose of vaccine. Going forward, we expect
almost the entire adult population to get partially
vaccinated before the end of 2021 (for details, see – India
Macrobook, Sep-21). In the short term, this could keep core
inflation elevated with downward rigidity despite the
persistence of a negative output gap.
From monetary policy perspective, inflation data continues to provide an
uneasy comfort. The cyclical comfort on food inflation needs to be
weighed against signs of persistence in core inflation.
“So far as India is concerned, core inflation has remained elevated, and that is
a policy challenge, and we are keeping a very close watch of the evolution of
the core inflation” – RBI Governor, Das (Nov-21)
Having said so, with policy tolerance for above target inflation (4%)
remaining in place till risks from the pandemic persists, we
believe the accommodative stance would linger on with repo rate
at 4.00%, in the remaining part of FY22.

However, with sequential economic recovery taking shape amidst

gradual phasing out of lockdown restrictions and improvement
in vaccination coverage, normalization of monetary policy needs
to get nudged forward (as also seen in case of few key countries). We
stick to our call on the need to restore the width of the LAF
corridor to 25 bps (normal setting) from 65 bps currently
(emergency level accommodation). The expansion in the scope of
VRRR auctions to calibrate the liquidity free float and pushing short term
rates up within the LAF corridor is indeed a precursor for interest rate
normalization and should be seen as a soft signal. While MPC is not
mandated to vote on reverse repo rate, we see possibility of at least 3
out of 6 members to support a two-step upward adjustment (20
bps each) in reverse repo rate between Dec-21 and Feb-22.

Table 1: Sequential price momentum sees a surge in the month of Oct-21

Sequential Change (% MoM) Oct-20 Sep-21 Oct-21

CPI 1.28 0.18 1.41
Food & Beverages 2.04 0.06 2.26
Pan, Tobacco & Intoxicants 0.27 0.16 0.31
Clothing & Footwear 0.33 0.55 0.61
Housing 0.96 -0.18 0.93
Fuel & Lubricants 0.35 0.74 0.98
Miscellaneous 0.20 0.25 0.63

Memo Items:
Non-Core CPI 1.89 0.12 2.08
Core CPI 0.59 0.25 0.68
Source: CEIC, QuantEco Research

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 CPI: Uneasy comfort

AUTHORS: QuantEco Research

Author Name 1 Author Name 2 Author Name 3

Economist Economist Founder
+91 9871588331 +91 9867122910 +91 9820037413
yuvika.singhal@quanteco.in vk@quanteco.in shubhada.rao@quanteco.in

About QuantEco Research

QuantEco is an independent research house providing business economics and financial markets intelligence to corporates and
investors. Powered by decades of rich industry experience, Dr. Shubhada Rao is leading the research team at QuantEco, which blends
cutting edge analytics with qualitative analysis to assess emerging trends in the Indian economy.

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