April 2023 CPI inflation falls 96 bps to 4.70%

13 May 2023 , 09:11 AM

In April 2023, the CPI inflation fell sharply by 96 basis points to 4.70% from 5.66% in March 2023. On a slightly longer term perspective, CPI inflation in India had peaked at 7.79% in April 2022 and the rate hikes commenced in May 2022. Between May 2022 and February 2023, the RBI hiked rates by a full 250 basis points. In response, the CPI inflation has fallen a full 409 basis points. Ironically, this is despite the RBI abstaining from rate hikes in the April 2023 policy. In 4 out of the last 6 months, CPI inflation stayed below the 6% outer tolerance limit of the RBI.

Inflation under 6%, but 4% still elusive

If you look at the components of inflation in March 2023, both food inflation and core inflation have fallen perceptibly. If you look at the fall over March 2023, food inflation fell 95 bps to 3.84% while core inflation fell 65 bps to 5.30%. From the peak of September 2022, food inflation is down 476 bps while core inflation is down decisively below the 6% mark. 

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Apr-22	8.38%	6.97%	7.79%
May-22	7.97%	6.08%	7.04%
Jun-22	7.75%	5.96%	7.01%
Jul-22	6.75%	6.01%	6.71%
Aug-22	7.62%	5.90%	7.00%
Sep-22	8.60%	6.10%	7.41%
Oct-22	7.01%	5.90%	6.77%
Nov-22	4.67%	6.00%	5.88%
Dec-22	4.19%	6.10%	5.72%
Jan-23	5.94%	6.10%	6.52%
Feb-23	5.95%	6.10%	6.44%
Mar-23	4.79%	5.95%	5.66%
Apr-23	3.84%	5.30%	4.70%

Data Source: MOSPI & Ministry of Finance Estimates

If you compare April 2023 CPI inflation with the peak inflation of 7.79% in April 2022, it is now a full 409 basis points lower. However, this fall is much less than the 1200 basis points fall in the wholesale price index (WPI Inflation) from the peak. Of course, WPI inflation is more sensitive to monetary tightening and is, often, a lead indicator or precursor to CPI inflation. Incidentally, April 2023 is the 43rd successive month when the CPI inflation has been above the median RBI inflation target of 4%.

Let us look at the food basket, which has the highest weight in the CPI index. The pressure is coming principally from cereals, spices, and high protein products like milk. However, negative inflation in vegetables and oils & fats has offset the impact with meat & fish also joining the negative inflation fray. Cereals inflation has been an outcome of a weak Kharif output in 2022 while spices and milk have seen prices rising amidst supply shortages. Spices inflation stands at 17.43%, cereals inflation at 13.67% and milk products at 8.85%. On the downside, vegetable prices contracted by -6.50%, while oil & fats prices contracted by a whopping -12.33% in April 2023. That managed to rationalize the food basket.

April 2023 saw a sharp fall in rural and urban inflation

The interplay between rural and urban inflation is interesting. Till January 2023, it was rural inflation that had hit prices hard. In February and March, it was the turn of urban inflation to dominate. In April 2023, both appear to have stabilized. Let us look at the macro picture first. Between March 2023 and April 2023; overall inflation tapered from 5.66% to 4.70%. During the same period, rural inflation fell from 5.51% to 4.68% while urban inflation fell from 5.89% to 4.85%. What about food inflation? Rural food inflation tapered from 4.72% to 3.83% over previous month while urban food inflation fell from 4.82% to 3.69%. 

In terms of specific items in the inflation basket, cereals inflation is still higher in rural India at 14.16% compared to 12.48% in urban India. However, rural India is seeing lower inflation in high protein items like eggs, meat, fish, and milk.  The contraction in vegetable inflation is much sharper in rural India at -7.10% compared to -5.56% in urban India. The other major inflation item, spices, has seen higher inflation in rural India. On the other items in the basket, some of the core inflation items are lower in the rural areas and that has helped rural inflation sober in April 2023.

Core inflation finally sees a sharp fall to 5.3%

Core inflation (inflation excluding food and fuel), which had stayed elevated at 6.1% between December 2022 and February 2023, fell to 5.95% in March 2023 and further to 5.30% in April 2023. The challenge with core inflation is that, as long as it stays elevated, it is tough to bring down headline inflation. Unlike food and fuel inflation, core inflation is sticky, rather than cyclical; signifying a tougher policy challenge.

The target here is to keep core inflation around 4%, but that is a long hop as of now. Core inflation has stayed above 6% for 8 out of the last 13 months, so genuine signals are still elusive. While the US economy saw a sharp fall in core inflation even in the US, the core inflation is struggling to decisively fall below the 5.50% mark.

 

How the food basket constituents compare in April 2023

Here are some major highlights of the food basket story in April 2023.

• Let us first look at the high protein and high vitamin intake. Meat and fish inflation stays in negative territory at-1.23% for April 2023 compared to -1.42% in March 2023 and 3.39% in February 2023. Inflation in eggs is up 3.30% in April 2023 compared to 4.41% in March 2023 and 4.32% in February. Oils and fats dipped further into negative, contracting at -12.33% in April 2023 compared to -7.86% in March 2023 and -0.49% in February. However, inflation in milk remains elevated at 8.85% in April 2023.

   

• Fruits inflation was subdued at 2.09% in April 2023 compared to 7.55% in March 2023 and 6.38% in February. Vegetables inflation is still negative at -6.50% in April 2023 compared to -8.51% in March 2023 and -11.61% in February. Among others, pulses inflation was elevated at 5.28% in April compared to 4.33% in March and 4.09% in February. The real challenge remains cereals inflation in the food basket which stays elevated at 13.67%. 

Inflation pressure is visible in index-heavy items like cereals and milk products and that has put sustained pressure on headline inflation. Rabi has helped sober prices to some extent.

RBI has strong reasons to hold repo rates

In our previous report we had said that RBI would hold rates if inflation stayed below 6%. With CPI inflation at 4.70%, the RBI has the incentive to continue with its repo rate status quo in the June 2023 policy too. There is already pressure building up on the RBI as industry and trade bodies were lobbying hard against the rising funding costs. 

1. The RBI held rates at 6.5% in April 2023 policy, but has underlined it was a pause and not a change in stance. However, with the IIP for FY23 still tepid and inflation below 5%, the repo rates could stay put for now, although rate cuts look unlike for now. 

    

2. The RBI decision to hold rates was not about the banking crisis but about the rising cost of funds in India. Funding costs are impacting balance sheet solvency and the RBI cannot take chances at a time when the banking health has just turned around.

The April 2023 shows a quantum fall in inflation. But, it is a hot summer and Kharif could get impacted in 2023 too. For now, the RBI stance would be to hold rates and manage inflation expectations. RBI has charted its own course on monetary policy and it may have hit the monetary bull’s eye.