Marginal Dip In CPI Inflation To 6.4% In Feb Raises Likelihood Of Another Rate Hike By MPC In April Meet: ICRA

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ICRA Research Report

In line with our expectations, the headline Consumer Price Index inflation eased only marginally to 6.44% in February 2023 on a YoY basis from the three-month high of 6.52% in January 2023, with upticks in inflation for cereals, milk and fruits, as well as pan, tobacco and intoxicants, and housing nearly offsetting the dips in the other three categories.

Based on the early trends in the prices of food items and a high base (March 2022: up 7.0%), the CPI inflation is projected to soften to 5.9-6.0% in March 2023.

There was a relatively larger step-up in prices of some services in the post-pandemic period, following the reopening in the economy. However, annual changes in the services segment are likely to be of a smaller quantum going ahead, which may lead to some tempering in the core inflation in FY24.

Such factors, along with a higher base, suggest that the CPI inflation will dip to 5.4-5.6% in Q1 FY24. At the same time, there are concerns around the impact of a likely heatwave on the wheat crop and the consequent impact on wheat prices in the near term.

This along with the possibility of the occurrence of El Nino around the summer season and its impact on monsoons would play an important role in determining the trajectory of food inflation over the next few quarters.

With the CPI inflation printing above the 6% tolerance level in January-February 2023, the Monetary Policy Committee may vote for another rate hike in its April 2023 meeting, although the decision is expected to be non-unanimous based on the minutes of the February 2023 policy review and the anticipated dip in the inflation in Q1 FY24.

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ICRA CPI February 2023.pdf

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