India’s CPI (Consumer Price Index) inflation rate for October 2022 came in above the central bank’s comfort zone for the tenth consecutive month but there were some silver linings. Both general CPI inflation and Consumer Food Price inflation showed a material moderation compared to the September numbers, with general inflation slowing from 7.41 to 6.77 per cent and food inflation from 8.6 to 7.01 per cent. About 14 of the 20 items making up the CPI basket showed lower price rise compared to September.

Also welcome was sequentially lower inflation in items with significant weights in the household consumption basket such as cooking oils, vegetables, pulses and fuel and light. Core inflation components particularly services are showing signs of flattening, though not abating. Active government interventions, such as import duty cuts on edible oils and the seasonal waning of fruit and vegetable prices due to the onset of winter, seem to have helped these trends. A further moderation in inflation numbers is subject to a few factors. For one, despite government efforts to alleviate shortages through export curbs and duties, cereal supplies are not very comfortable at this juncture. With a sizeable shortfall in centralised procurement of wheat this year and rice acreage below par (even as the PM Garib Kalyan Yojana has been extended), buffer stocks are running low. Kharif prospects for rice and rabi sowing for wheat hold the key to cereal inflation cooling from its recent 12 per cent levels.

Two, with oil marketing companies trying to compensate for earlier under-recoveries, the pass-through of declines in crude oil and gas prices to domestic consumers has suffered from a lag. Three, though a late-staying south-west monsoon and post-monsoon rains have improved soil moisture and reservoir storage for rabi crops, they have impacted the standing kharif crop adversely in many States. The impact of this on farm output is yet to be gauged. Weighed against all this, a material moderation in WPI — a leading indicator of CPI — from 16.6 per cent in June 2022 to 8.3 per cent in October offers hope that the bite of inflation on the aam aadmi may be lessening a bit.  

Overall, recent trends in inflation do offer the central bank and its Monetary Policy Committee (MPC) reasons to recalibrate their pace of hikes. MPC minutes for the previous meeting showed some members making out a case for a slower pace of hikes or a pause going forward, on the grounds that the pass-through of earlier hikes was yet to happen. Recent reiteration of India’s relatively stable prospects have led to a return of foreign portfolio flows, strengthening the case for India to chart a more independent path on monetary policy, especially if moderating food inflation tempers household inflation expectations. Unlike in the US or the Western world, inflation in India continues to be driven largely by seasonal and global factors and there is little evidence of a wage-price spiral contributing to intractable inflation. These factors, hopefully, will prompt the MPC to consider a lower hike or a pause in the December meeting.