CPI Data September 2023: Will Inflation Rate Ease Below RBI's Tolerance Limit Of 6%?

The Ministry of Statistics & Programme Implementation is set to release consumer price index (CPI) inflation data for September 2023 on October 12. The September month's inflation data will come after RBI unanimously decided to hold key rates for the fourth consecutive policies, and their tone remained hawkish, along the expected lines. In the previous month, CPI eased sharply to 6.83% in August 2023, better than market expectations. However, inflation continues to stay above RBI's tolerance limit. More moderation is expected ahead in inflation.

Retail price inflation in India dropped to 6.83% in August, better than market forecasts of 7% --- which does come as a relief, especially after CPI touched a 15-month high of 7.44% in July due to a behemoth rise in prices of tomatoes and onions. Also, inflation is better than the 7% rate recorded in August 2022. Coming to food inflation, it had relaxed to 9.94% in August 2023 compared to the previous month's print of 11.51% which was the highest level since January 2020, before the Covid-19 outbreak.

Explaining the moderation in the August 2023 inflation print, Prabhudas Lilladher in its EcoFlash report, said that CPI fell by 0.05% MoM, mainly driven by a drop in increased vegetable prices. It was sharply lower than the series average of 0.70% MoM jump, usually seen in August. Moreover, this is the first time that the index moved lower in August.

Further, the brokerage highlighted that CPI Inflation in August 2023 has seen relief emanating from the food basket, which saw a 0.52% MoM fall, led by Vegetables, Egg Meat and fish. Tomatoes (with a ~22% MoM fall) dominated the price move in the Vegetable index, as supply started responding to the build-up in price since June 23. Nevertheless, limiting the decline in overall food inflation was continued price pressure seen from Cereals and Pulses, which remain on watch in the near term.

Prabhudas expects moderation in CPI to continue even in September 2023.

It said, "On the domestic front, notwithstanding some moderation, inflation expectations continue to remain above pre-Covid levels, with several upside risks warranting attention. The OPEC+ resolution to persist with production cuts is exerting upward pressure on crude oil prices. Concurrently, global commodity prices, particularly food, are escalating due to the termination of the Ukraine grain deal and India's rice export ban. The looming El Nino threatens global food production, potentially intensifying these price surges. Domestically, despite the government's administrative interventions like open market sales and stockholding limits, the persistent price strains in cereals and pulses remain concerning. The erratic monsoon patterns further cloud the outlook, impacting Kharif crop yields and Rabi sowing. However, a silver lining emerges with the recent Rs 200 reduction in LPG cylinder prices, anticipated to moderate the September CPI by approximately 30-35 bps."

Also, Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, "The diminishing trend in CPI inflation witnessed in August will continue in September with the CPI print declining to 5.8 percent. The prime driver of the declining retail inflation will be decline in vegetable inflation, particularly the sharp dip in tomato prices from above Rs 200 to around Rs 20 in September. However, the elevated prices of food grains, pulses and sugar will prevent a sharp dip in inflation."

Meanwhile, after RBI's October 2023 policy, ICRA said, "The tone of the policy remained quite hawkish, along expected lines. Notwithstanding revisions in the Q2-Q3 forecasts, the FY2024 CPI inflation projection was kept unchanged at 5.4%, similar to ICRA's estimate, while the GDP growth forecast for FY2024 was also retained at 6.5%."

ICRA believes that further monetary tightening is not warranted at the current juncture, unless inflation exceeds the Committee's forecasts for at least two quarters, with evidence of transmission of pressures to core inflation. Hence, it expects an extended pause on the policy rate until the beginning of a shallow rate cut cycle in Q2 FY2025.

Earlier, after August inflation data, ICRA stated that it expects e CPI inflation to print in the range of 5.3-5.5% in September 2023, this will still entail an average of 6.6% for Q2 FY2024.

If that is the case, then the average inflation of 6.6% would still be in line with RBI's forecast of 6.4% in Q2 of FY24.

According to CARE Ratings, given the recent spike in food inflation in July and August, the RBI has revised up its Q2 FY24 projection to 6.4% from its earlier projection of 6.2%. This implies that inflation in September at around 5% which is below the market expectation. At the same time, the RBI predicts inflation to moderate in the months ahead as it has reduced its Q3 FY24 projection to 5.6% from its earlier projection of 5.7%. The full-year projection of inflation was retained at 5.4%.

In October policy, RBI said, the near-term inflation outlook is expected to improve on the back of vegetable price correction and the recent reduction in LPG prices.

RBI added the future trajectory will be conditioned by several factors like lower area sown under pulses, dip in reservoir levels, El Niño conditions and volatile global energy and food prices. According to the Reserve Bank's enterprise surveys, manufacturing firms expect higher input cost pressures but marginally lower growth in selling prices in Q3 compared to the previous quarter. Services and infrastructure firms expect a moderation in the growth of input costs and selling prices.

Taking into account these factors, RBI predicts CPI inflation at 5.4% for FY24 --- with Q2 inflation at 6.4%, Q3 rate at 5.6%, and Q4 estimated at 5.2%. RBI had factored CPI to be around 5.2% in the first quarter of FY25.