How LPG Prices Cut By Rs 200 Per Cylinder Will Reflect In September CPI Inflation Print?

The latest inflation rate eased to 6.83% in August 2023 owing to fading inflationary pressures in vegetable categories. Also, in the same month, core inflation found favourable support from the transport and communication (T&C) category and clothing and footwear. Nevertheless, fuel and light along with housing inflation climbed in August. For September 2023, brokerage JM Financial expects the LPG price cut by Rs 200 per cylinder to reflect in fuel inflation.

Consumer Price Index (CPI) inflation in India dropped to 6.83% in August, better than market forecasts of 7% --- after touching a 15-month high of 7.44% in July due to sky-high prices of tomatoes and onions. The sharp decline in food inflation to 9.94% in August 2023 compared to the previous month's print of 11.51% which was the highest level since January 2020, was the biggest contributor in pulling overall inflation from the 7% mark.

In its note, JM Financial said, "We expect a 25bps moderation in fuel inflation in Sep'23 due to the Rs 200/cylinder cut in LPG prices," adding, "However we remain cautious of the deficient rainfall and depleting reservoir levels which may fuel inflationary pressures calling for tighter monetary conditions."

To abate the impact of stubbornly high inflation in India, the government led by PM Modi in August announced a substantial reduction in the price of cooking gas. With effect from August 30, 2023, the price of a 14.2 Kg LPG cylinder trimmed by 200 in all markets across the country. In Delhi for instance, the decision will bring down the cost of a 14.2 Kg cylinder from the existing Rs 1103 per cylinder to a more affordable Rs 903 per cylinder.

Notably, the reduction is in addition to the existing targeted subsidy of Rs 200 per cylinder to PMUY households, which will continue. For PMUY households, therefore, the effective price in Delhi after this reduction will be Rs 703 per cylinder.

At present, there are more than 31 crore domestic LPG consumers in the country including 9.6 crore PMUY beneficiary families and this reduction will help all LPG consumers in the country.

In August month, the fuel and light inflation rate stood at 4.31% versus 3.7% in July month. Also, the housing inflation rate climbed slightly to 4.38% in August as against 4.5% in the previous month.

JM Financial explained that recent retail prices from September 1st to 11th indicate the absence of inflationary pressures.

Although the brokerage expects the inflation trajectory to trend down, even a CPI print of 5.6% in Sep'23 would warrant an upward revision of ~40bps to RBI's inflation projection of 6.2% for Q2FY24.

Amidst moderation in headline inflation, JM Financial highlighted that the Core category (Net of food, fuel and intoxicants) further eased but at a shallow pace (4.9%, 0.4% MoM). The contribution of the transport and communication (T&C) category and clothing & footwear aided core inflation. It continues to expect moderation in the core category ahead.

RBI's Policy Rates Decisions on October 6, 2023:

As per JM Financial's note, assuming a CPI print of 5.6% in Sep'23, it expects an upward revision of ~40bps in RBI's inflation projection for Q2FY24 in the upcoming MPC meeting in Oct.

Inflation has stayed sharply above RBI's medium-term target for consumer price index (CPI) inflation of 4% within a band of plus and minus 2%. Hence, RBI's upper tolerance limit for CPI is 6%. The CPI has been above RBI's upper tolerance limit for two consecutive months now.

"On the domestic front, we reiterate our expectation of an extended pause, as RBI would be more concerned with the inflation trajectory over the rate of inflation. However deficient rains and depleting reservoir levels may negatively impact Kharif yields and Rabi sowing. Hence we remain cautious of any signs of persisting inflationary pressures in food category, which may compel RBI to hike policy rates," it added.

In August, RBI decided to keep policy rates unchanged for the third time in a row since the onset of the current financial year. Accordingly, the policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%.

From May last year, in an off-cycle, RBI began hiking rates due to intense inflationary pressure that boomed after geopolitical tension between Russia and Ukraine. However, RBI has maintained the status quo on key rate hikes since the start of FY24 and is in wait-and-watch mode over inflation movement and the impact of rate hikes on the economy. From May 2022 to February 2023, RBI hiked rates by 250 bps.