Lower-Than-Expected CPI Inflation Of 5.7% In December May Prompt MPC To Pause In Feb 2023 Policy Review: ICRA

ICRA Research Report

The headline Consumer Price Index inflation provided a positive surprise, dipping to a lower-than-expected 5.7% in December 2022 (our expectation: up 5.9%) on a YoY basis from 5.9% in November 2022, aided by a welcome fall in the food inflation.

Notwithstanding the softening in prices of several essential commodities seen in early-January 2023 and the healthy rabi sowing trends, an unfavorable base could cause the food inflation print to harden somewhat in the ongoing month.

We caution that the CPI inflation for January 2023 may print at ~5.8-6.0%,slightly higher than the levels seen in December 2022, given the stickiness in core inflation and an unsupportive base for food inflation.

While the average CPI inflation in Q3 FY23 (up 6.1%) has come in significantly below the Monetary Policy Committee’s projection of 6.6%, we foresee a flattish print in Q4 FY23, before a considerable correction sets in during Q1 FY24.

Taking into account the lower-than expected CPI inflation print for December 2022, and the muted average growth of 1.3% seen in the Index of Industrial Production) during October-November 2022, we anticipate that the MPC may pause in its February 2023 policy review.

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