CPI down further to 4.3% as food inflation continues to dip, core ticks up

Consumer price index (CPI)-based inflation came in at 4.3% in March, after a 60 basis points (bps) fall to 4.4% in February. Although food inflation rate fell more – by 40 bps over February – and overall fuel inflation decelerated by 100 bps, core inflation edged up.

Inflation in housing, the category that had rapidly been pushing up core inflation in the recent past, stood steady for the third month in a row even as other core inflation categories ticked up.

For full fiscal 2018, CPI inflation averaged 90 bps lower at 3.6% compared with 4.5% in fiscal 2017. Most of the fall was on account of food inflation, which fell 240 bps, while fuel inflation rose 260 bps. Core inflation was also moderately lower, falling 30 bps.

However, inflation pressures are beginning to rear up. Global crude oil prices have continued to rise and were nearly 24% higher on-year in March.

In fiscal 2019, CRISIL expects crude oil prices to rise another 13% on average. Similarly, metal prices are also firmer. Given improving domestic demand conditions, manufacturers are likely to pass on higher input prices to consumers, which will show up in core inflation.

Similarly, there could also be pressure on food inflation if elements of the minimum support price (MSP) announcement, such as setting it at 1.5 times the cost of production, extension of MSP to all kharif crops, and assuring at least MSP is paid to all farmers, together with rise in import duties are implemented.

For next fiscal, CRISIL expects CPI inflation to perk up but stay benign overall and within the Monetary Policy Committee’s (MPC) projected trajectory. The MPC expects inflation to average ~4.7% in fiscal 2019 with the expectation that it will significantly moderate in the second half. Yet, given upside pressures, the MPC will stay vigilant on the evolving inflation scenario.

CRISIL expects the repo rate to remain unchanged over the next six months unless upside risks to the MPC’s inflation forecast materialise. We foresee CPI inflation averaging 4.6% next fiscal. The pick-up will be due to rising consumption demand, impact of house rent allowance revisions on housing inflation, and higher global crude oil prices. Food inflation will have a softening bias and is likely to stay relatively soft given the expectation of a normal monsoon. But aggressive implementation of announced MSP measures could create an upside.