Will a decline in CPI inflation ease interest rates?

According to data released on December 12 by the Ministry of Statistics and Programme Implementation, India's headline retail inflation rate fell to an 11-month low of 5.88% in November from 6.77% the month before.

The CPI inflation rate has gone over the medium-term target of 4% for 38 consecutive months.

The RBI, which has been raising interest rates relentlessly since May, will be greatly relieved by the sudden drop in inflation.

What are the likely causes of a sudden drop in CPI Inflation?

- The working month was shorter this year due to Dussehra and Diwali falling in October (instead of November last year when Diwali fell), which had an impact on both exports and industrial growth in October.
- The 4% YoY decline in industrial output, driven by a 5.6% YoY decline in manufacturing, was concerning nonetheless. 
- The economy is being boosted by strong growth in the services and agricultural sectors, but the cyclical industrial sector's recovery has remained patchy. 
- A potential slowdown in the investment spending that has been essential to India's recovery could be seen as evidenced by the fact that capital goods output decreased 2.3% YoY in October 22 and capital goods imports slowed to a 2.1% YoY growth rate in the same month.

Impact on Food Inflation:

- Cost of food in India increased 4.67 percent in November of 2022 over the same month in the previous year. It is the smallest rise in food prices so far this year, prompted by an 8% decline in prices for vegetables.
- With a weight of 54.18 percent, the food and beverage component of the CPI decreased 0.72% MoM in November of last year, and its YoY inflation rate slowed to 5.07%. Only 4.07% YoY growth was seen in the CFPI, which makes up 47.25% of the CPI. 
- Unseasonal rains during the critical harvest period affected the rice crop, contributing to the continued high inflation of cereals and products up by 12.96% YoY and spices up by 19.52% YoY. 
- Vegetable prices, however, fell by 8.08% YoY, sugar and confectionary prices fell by 0.25% YoY, and oils and fats prices fell by 0.6% YoY. 
- There was only modest inflation in the prices of fruits up by 2.62% YoY, meat and fish up by 3.87% YoY, eggs up by 4.86% YoY, and pulses up by 3.15% YoY. 
- Global sugar inflation has risen as a result of export restrictions, but India has been successful in keeping domestic prices well in check.

Impact on Other Industries:

- Fuel prices and light inflation were able to decline to 10.62% YoY in November 2022 due to moderated global oil prices. 
- The cyclical industrial sector is struggling, with its output declining 4% YoY in Oct'22 and manufacturing declining even more sharply 5.6% YoY, while agriculture and services continue to support the economy. 
- The rest of industry experienced unrelieved gloom, with the exception of motor vehicles up by 12.3% YoY, printing & manufacture of recorded media up by 14.6% YoY, basic metals up by 4.1% YoY, and fabricated metal products up by 6.5% YoY.
- The output of consumer goods was especially weak in October of this year, with consumer durables falling by 15.3% YoY and consumer non-durables falling by 13.4% YoY. 
- Consumer durables production is up 6.6% YoY for the period of April through October 2012, while consumer non-durables output has decreased 4.2% YoY. 
- Even though production of motor vehicles increased in October 22, consumer durables were negatively impacted by the decline in "consumer durables," which include clothing with a drop by 37.1% YoY, leather, and leather products a drop of 12.7% YoY.

How interest rates will affect inflation ahead?

Inflation will be slowed with a lag as a result of the policy repo rate's 35 basis point increase from last month. 
The average CPI inflation for FY23 will be 6.4% YoY, and 5.6% YoY in H2FY23, compared to the RBI's prediction of 5.9% YoY for Q4FY23. 
However, prior rate hikes will ensure that headline inflation moderates to 5.6% YoY in Dec'22 and 5.2% YoY in Q4FY23. 
No further rate increases will be required this cycle because in Q1FY24, inflation will have subsided to less than 5% YoY.

Will a decline in CPI inflation ease interest rates?

The RBI predicted that the CPI would be 6.6% in Q3FY23. The average for the months of October, November, and December is 6.3%, which is probably less than they anticipated for the third quarter. Despite the RBI's recent policy sounding hawkish and mentioning core inflation, the current CPI data print has allowed for the repo rate to remain unchanged as long as global factors, particularly the US Fed rate hike, remain benign.