ab12 January 2024Global Research and Evidence LabIndia Economic CommentHeadline CPI inflation remains largely stable at 5.7% in DecemberCPI inflation was below market expectationsDespite an unfavourable base effect, headline CPI inflation (5.7%YoY) in December was below consensus expectations (5.9%YoY) largely due to sequential moderation in food inflation and benign core inflation. This compares with 5.6% YoY registered in the previous month. Notably, the core inflation eased to a 48-month low of 3.9%YoY in December. Price pressure in rural areas (5.9%YoY) was higher than in urban areas (5.5%YoY). Inflation to soften further; rates to be kept on a prolonged pause in FY24We expect headline CPI inflation to soften towards 5-5.2% YoY in the month of January on gradual easing in food prices and comfortable core inflation. We maintain our baseline view that headline CPI inflation will average 5.4% YoY in FY24. We continue to expect repo rate to be kept on pause in the February policy review. We expect the MPC to remain nimble in liquidity management to ensure overnight rate stays around/above the repo rate in the coming months. We continue to expect a shallow rate cut cycle in FY25 once inflation moderates and the Fed starts its easing cycle.Sequential moderation in food inflation was largely led by vegetable pricesFood inflation moderated (-0.9%MoM) sequentially in December largely led by vegetables (-5.3%MoM) including onions(-16%MoM) and tomatoes (-9.4%MoM). Inflation in other segments including cereals (+0.8%MoM), pulses (+0.5%MoM) and sugar (+0.3%MoM), on the other hand, picked up sequentially in December. On a YoY basis, food inflation accelerated to 8.7%YoY in December compared to 8.0%YoY in November. The high frequency price data that we track for January (till date) suggest that while pulses and edible oil prices increased further, cereal prices are showing sequential moderation. Amongst key vegetables, tomatoes, onion and potato (TOP) prices are also showing some correction in January. Inflation in fuel & light segment, on the other hand, continued to decline 1.0%YoY in December (vs. -0.8%YoY in November). Core inflation eased further in DecemberCore inflation eased further to 3.9%YoY (vs. 4.1% in the previous month). Inflation in the transport & communication segment remained largely stable at 2.0%YoY (vs. 2.1% in November). Excluding the two major energy components (petrol and diesel), the calculated refined core inflation eased to 3.9%YoY (vs. 4.2% in the previous month). Looking at the breakup, the deceleration in inflation was largely broad-based led by clothing & footwear (3.6%YoY vs. 3.9% in November), health (5.1%YoY vs. 5.5% in November) and personal care & effects (7.3%YoY vs. 7.8%YoY in November). This report has been prepared by UBS Securities India Private Ltd. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including infor...
