Food inflation may clock-in at 8% MoM

We preview February 2023 Consumer Price Index (CPI) headline inflation, where we expect the data point to clock-in at 31.5 per cent. The higher jump is the result of an increase in the food prices, which is 30 per cent of the CPI basket.

Breaking the reasons of the higher food inflation, to recall, the sharp adjustment in the rupee depreciation has resulted in 16 per cent increase in the petroleum products prices, leading to higher transport costs.

However, we do not rule out the actual jump to be higher than our projections, driven by the rural segment, a trend continuing since the last six months.

The food inflation may clock-in at 8 per cent MoM, led by higher wheat, rice, chicken, cooking oil, fresh fruits and vegetable prices.

These food items contribute a total weight of 10 per cent to the CPI basket that may post an average MoM increase of 27 per cent.

The situation is grave with the expectations of 50 per cent YoY food inflation for February 2023E, where the probability of higher prices is way more than stability or a decrease in the coming months.

With the next leg of petroleum products price increase of Rs22/litre (9 per cent) announced in the middle of February, again pertaining to the rupee depreciation, we would witness higher transport and food prices in March 2023 CPI data.

This would be in addition to the impact arising out of the macro adjustments, such as the recent gas price rise, due increase in the power tariffs and impending taxes and levies on the petroleum products.

The same would also bring another sharp increase in the food prices, making the situation even worse. This scenario would likely to keep the CPI levels above the existing key policy rate of 17 per cent till at least December 2023, assuming no relief from a prospective decline in the commodity prices, delaying any monetary easing opportunity.

In addition, the news flow, suggesting the International Monetary Fund (IMF) recommendations to bring real interest rates in the positive zone (negative 1,100bps at present) highly increases the prospects of monetary policy to continue to tighten during the first quarter of CY23.

While the next monetary policy announcement is scheduled in March, the secondary market yields have incorporated expectations of 100bps hike in the shorter tenor yield movements last week.