In September 2023, India’s Consumer Price Index (CPI) inflation eased to 5.0% YoY due to a correction in food inflation. The sharp decline in fuel inflation, driven by the reduction in LPG prices, also contributed to the fall in headline inflation.

The decline in food inflation can be attributed to the ongoing correction in vegetable prices (16% MoM in Sep’23). Vegetable prices, which experienced a sharp increase in June-July 2023 (primarily due to a surge in tomato prices), have since corrected during August-September 2023. Cereals inflation, however, continues to remain elevated, with cereals now being the largest contributor to headline inflation. Overall, food inflation remains broad-based, with 39% of items within the food basket witnessing inflation rates exceeding 6%.

Core inflation fell to 4.6% YoY in September 2023 from 4.8% in the previous month. Refined measures of core inflation, which exclude transportation fuel and valuables, also continue to ease, reflecting a moderation in underlying inflationary pressures. Household inflation expectations also remain well-anchored, with median expectations down by 90 basis points for the three-month and 40 basis points for the one-year ahead periods.

We expect inflation to average around 5.5% in FY24. Poor pulses sowing, lower reservoir levels, and high crude prices pose risks to the inflation outlook. The RBI MPC is expected to maintain a prolonged pause until there is visibility of inflation sustainably reaching the 4% target.

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