CPI inflation for March 2023 falls to 15-month low of 5.66%

13 Apr 2023 , 09:44 AM

On a sequential basis, CPI inflation tapered from 6.44% in February 2023 to 5.66% in March 2023. This largely offsets the 80 bps jump in inflation in January 2023 from 5.72% to 6.52%. The inflation is still better than the consensus estimates. In fact, consensus view had correctly estimated that March 2023 inflation would be below the 6% mark. However, the actual inflation came in lower than their estimate of 5.8%.

Inflation below the RBI permissible outer limit of 6%

If you look at the components of inflation in March 2023, both food inflation and core inflation have fallen perceptibly over February. The good news was that core inflation fell from 6.1% to 5.8% while the food inflation fell from 5.95% to 4.79%. 

Month	Food Inflation (%)	Core Inflation (%)	Headline Inflation (%)
Mar-22	7.68%	6.32%	6.95%
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%	5.80%	5.66%

Data Source: MOSPI & Ministry of Finance Estimates

If you compare March 2023 CPI inflation with the peak inflation of 7.79% in April 2022, it is now about 213 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, the WPI inflation is more sensitive to monetary tightening and is, often, a lead indicator or precursor to CPI inflation. What cannot be overlooked is that March 2023 is the 42nd 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. 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 18.21%, cereals inflation at 15.27% and milk products at 9.31%. On the downside, vegetable prices contracted by -8.51%, while oil & fats prices contracted by -7.86% in March 2023. That has balanced the food basket.

March 2023 continues to be about urban inflation

There has been a silent shift in the last couple of months. Till January 2023, it was rural inflation that had hit prices hard. This time around, urban inflation is growing faster. Let us look at the macro picture first. Between February 2023 and March 2023; overall inflation tapered from 6.44% to 5.66%. During the same period, rural inflation fell from 6.72% to 5.51% while urban inflation fell just from 6.10% to 5.89%. Even if you look at food inflation, rural food inflation tapered from 6.60% to 4.66% over previous month while urban food inflation merely fell from 5.09% to 4.82%. There were concerns that weak Kharif and consequently lower incomes may have led to low demand and hence lower inflation in rural India. However, that is not what the rural demand for FMCG products shows.

In terms of specific items in the inflation basket, cereals inflation is still much higher in rural India at 15.98% compared to 13.66% in urban India. However, rural India is seeing lower inflation in high protein items like eggs and milk.  The contraction in vegetable inflation is much sharper in rural India at -9.56% compared to -6.69% 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 being more sober than urban inflation in March 2023.

Core inflation gets some relief, tapers to 5.8%

Core inflation (inflation excluding food and fuel), which had stayed elevated at 6.1% between December 2022 and February 2023, saw a 30 bps fall to 5.8% in March 2023. However, a few swallows do not a summer make. 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; marking a tougher policy challenge.

The target here is to keep core inflation around 4%, but that is a far cry as of now. Core inflation has stayed above 6% for 9 out of the last 14 months, so genuine signals are still elusive. The US economy, on the other hand, has seen fall in core inflation with the fall in overall inflation. High core inflation also signifies persistent supply chain constraints.

A quick look at the CPI food basket in March 2023

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

• Let us first look at the high protein and high vitamin intake. Meat and fish inflation has fallen into negative territory at -1.42% in March 2023 compared to 3.39% in February 2023 and 6.04% in January. Inflation in eggs is up at 4.41% in March 2023 compared to 4.32% in February and 8.78% in January. Oils and fats dipped further into negative, contracting at -7.86% in March 2023, compared to -0.49% in February. However, inflation in milk remains elevated at 9.31% in March 2023.

   

• Fruits inflation bounced back sharply to 7.55% in March 2023 from 6.38% in February and 2.93% in January 2023. Vegetables inflation is still negative at -8.51% in March 2023 compared to -11.61% in February and -11.70% in January. Among others, pulses inflation was at 4.33% in March compared to 4.09% in February and 3.89% in January. The real challenge was cereals inflation in the food basket which stays elevated at 15.27%. 

Inflation pressure is visible in index-heavy items like cereals and milk products and that has put sustained pressure on headline inflation. 

RBI will hold rates if inflation stays below 6%

In April 2023, the RBI surprised the street by holding repo rates at 6.5%. Clearly, there was pressure building up on the RBI as industry and trade bodies were lobbying hard against the rising funding costs. Here are two key takeaways.

1. The RBI held rates at 6.5% in April 2023 policy, but has underlined that this was a pause and not a change in stance. However, with the IIP also robust at above 5.5%, it looks like the RBI would not tinker further with rates as long as inflation stayed under 6%.

    

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

The March 2023 inflation data shows a quantum shift from the inflation numbers for January and February. However, the Kharif season would really tell us if the fall in inflation can be sustained. The cost of funds for manufacturing companies in India has gone up by 100 bps to 9.38% in the March 2023 quarter. That can have long-term repercussions. But, above all, the RBI has signalled that when it comes to monetary policy, it would be willing to chart its own course. That is the cryptic message and the fall in March 2023 inflation, perhaps, ratifies the line of thinking of the RBI.