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OVERVIEW

HIGHLIGHTS

The CPI inflation softened to a 24-month low 3.6% in November 2016 from 4.2% in October 2016 in year-on-year (YoY) terms, in line with our forecast (3.6%), primarily reflecting a favourable base effect, and to a smaller extent, subdued demand after the note ban.

The inflation for food & beverages eased to 2.6% in November 2016 from 3.7% in October 2016, benefitting from a favourable base effect, which pulled down the inflation for pulses to a series-low 0.2% from 4.1%, respectively. The disinflation for vegetables also deepened to 10.3% from 5.7%, respectively.

The core-CPI inflation (excluding food & beverages and fuel & light) was steady at 5.0% in November 2016, highlighting the stickiness of prices of services and other manufactured items, despite the note ban.

The sharp correction in the inflation for pan, tobacco and intoxicants to 6.3% in November 2016 from 7.0% in October 2016 offers the clearest evidence of a decline in demand for discretionary items after the note ban.

OVERVIEW

The CPI inflation moderated to a 24-month low 3.6% in November 2016 (+5.4% in November 2015), in line with our expectations, from 4.2% in October 2016 (+5.0% in October 2015; refer Table 1 and Chart 1). The sequential decline in the CPI inflation in November 2016 benefitted from an appreciable moderation in the inflation for food & beverages and pan, tobacco & intoxicants, as well as mild easing in the inflation for clothing & footwear, housing and fuel & light, whereas the inflation for miscellaneous items recorded an uptick.

The YoY inflation for food & beverages also declined to a 24-month low 2.6% in November 2016 from 3.7% in October 2016, primarily reflecting a favourable base effect; the inflation had hardened to 6.1% in November 2015 from 5.3% in October 2015. The softening in the retail prices of vegetables (to -10.3% from -5.7%, led by corrections in prices of potatoes and tomatoes), pulses (to +0.2% from +4.1%, led by a favourable base), oils & fats (to +2.7% from +4.0%), sugar (to +22.4% from +23.6%), eggs (to +8.6% from +9.5%), spices (to +6.5% from +7.4%), non-alcoholic beverages (to +3.7% from +4.1%), meat & fish (to +5.8% from +6.2%) and prepared meals, snacks & sweets (to +5.8% from +6.1%) contributed to the sequential decline in the YoY inflation for food & beverages in November 2016 (refer Chart 2). However, the inflation rose in November 2016 relative to the previous month for cereals (to +4.9% from +4.4%; partly on account of hardening prices of wheat), milk & products (to +4.6% from +4.4%) and fruits (to +4.5% from +4.4%). In month-on-month (MoM) terms, the food & beverages sub-index recorded a decline of 0.7% in November 2016 (refer Chart 3), on account of perishables such as vegetables (-6.0%) and fruit (-0.4%), as well as pulses (-0.3%), whereas the other sub-groups recorded higher or steady prices despite the note ban. In November 2015, the sub-index for food & beverages had risen by 0.5% in MoM terms, driven by pulses.

The inflation related to fuel & light eased marginally to 2.8% in November 2016 from the revised 2.9% in October 2016. The YoY inflation registered by this sub-index was the lowest amongst all the sub-indices for the ninth month in a row in November 2016. The fuel & light sub-index rose by 0.6% in MoM terms in November 2016, similar to the uptick of 0.7% each in November 2014 and November 2015.

The core-CPI inflation was steady at 5.0% in November 2016, in line with the print for October 2016 (refer Chart 4), highlighting the stickiness of prices of services and other manufactured items, despite the note ban. As a result, the gap between the core-CPI inflation

CONSUMER PRICE INDEX NOVEMBER 2016

CPI inflation eases to 3.6% in November 2016 from 4.2% in October 2016, primarily reflecting favourable base effect, and to smaller extent, subdued demand after note ban

DECEMBER 2016

Contacts: Aditi Nayar +91 124 4545 385 aditin@icraindia.com

Contact: Aditi Nayar +91 124 4545 385 aditin@icraindia.com

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and the headline CPI inflation widened in November 2016. On an MoM basis, the core-CPI rose by 0.3% in November 2016, similar to the rise in November 2015.

The inflation for miscellaneous items (accounting for a weight of 28.3% in the CPI Index) inched up to 4.8% in November 2016 from 4.7% in October 2016, led by personal care & effects (to +7.7% from +7.2%) and transport & communication (to +3.8% from +3.4%). This was partly offset by a considerable moderation in the inflation for household goods & services (to +4.2% from +4.4%) and health (to +4.5% from +4.7%). Overall, the sub-index for miscellaneous items increased by 0.3% in MoM terms in November 2016, higher than the 0.2% MoM uptick in November 2015.

The inflation for clothing & footwear (with a weight of 6.5% in the CPI Index) softened to 5.0% in November 2016, after remaining unchanged at 5.2% in the trailing three months. In MoM terms, the sub-index for clothing and footwear rose by 0.4% in November 2016, lower than the MoM increase of 0.5% and 0.6%, respectively, in November 2014 and November 2015.

The inflation for pan, tobacco & intoxicants (with a weight of 2.4% in the CPI Index) declined to a series-low 6.3% in November 2016 from 7.0% in October 2016, indicating a curtailment in discretionary spending after the withdrawal of legal tender status for existing Rs. 500 and Rs. 1,000 notes in November 2016. This sub-index increased by a muted 0.1% in MoM terms in November 2016, considerably lower than the same for November 2014 and November 2015 (+0.8%, each).

The housing inflation (with a weight of 10.1% in the CPI Index) eased mildly to a 12-month low 5.0% in November 2016 from 5.1% in October 2016. In MoM terms, the sub-index rose by 0.3% in November 2016, slightly lower than the rise in November 2015 (+0.4%).

The rural CPI inflation moderated to a 24-month low 4.1% in November 2016 from 4.8% in October 2016, led by food & beverages (to +3.2% from +4.2%), pan, tobacco & intoxicants (to +6.8% from +7.1%), fuel & light (to +3.8% from +4.3%) and clothing & footwear (to +5.9% from +6.3%). The rural CPI inflation for October 2016 was lower than the YoY growth in rural wages for the same month (6.2%) after a gap of 13 months (refer Chart 5).

The urban CPI inflation also softened to 3.0% in November 2016 (a 15-month low) from 3.5% in October 2016, led by pan, tobacco & intoxicants (to +4.9% from +6.7%), food & beverages (to +1.4% from +2.8%), housing (to +5.0% from +5.1%) and clothing & footwear (to +3.5% from +3.6%), even as there was an uptick in the inflation for fuel & light (to +1.0% from +0.3%) and miscellaneous items (to +4.0% from +3.8%). Nevertheless, the wedge between the rural and urban CPI inflation (refer Chart 6) narrowed in November 2016 compared to the previous month.

The buildup in the CPI Index up to November 2016 stood at 4.1%, considerably lower than the buildup of 5.3% recorded up to November 2015, on account of all the sub-indices except miscellaneous items (+3.8% vs. +3.0%).

The final headline CPI inflation for October 2016 was in line with the provisional print of 4.2%.

OUTLOOK

Tracking the usual seasonal trend following the onset of winter, the prices of various food items have softened in the ongoing month. However, the prices of rice, as well as wheat and atta have risen, following which the import duty on wheat was reduced to nil by the Government on December 8, 2016.

Crude oil prices have risen sharply in December 2016, after the decisions by Organization of the Petroleum Exporting Countries (OPEC) and some other major non-OPEC producers to cut back on output. This would transmit through to higher prices of some fuels over the course of December 2016. The weight of mineral fuels and fares in the CPI Index, with non-regulated pricing is limited at around 3%. A rise in the average crude oil price to ~US$55/barrel in the remainder of the year would have a first round impact of raising the average CPI inflation by around 20 bps in December 2016-March 2017.

ICRA expects the CPI inflation to trend upward during December 2016-March 2017 with the waning of the favourable base effect and hardening of crude oil prices, but remain below the RBI’s projection of 5% in Q4 FY2017. The Monetary Policy Committee had previously indicated that real interest rates may need to be below 150 bps in the global scenario of negative rates, compared with the earlier range of 150-200 bps. With no further revision in this stance, the room for incremental rate cuts appears to be limited to 25 bps over the next six months, unless lead indicators for economic activity for Q4 FY2017 do not reveal a recovery in growth.

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Table 1: Trend in CPI Inflation (YoY)

Weight YoY Inflation MoM Buildup* Sep-16 Oct-16 Oct-16 Nov-16 Nov -16 Nov -16 Final Provisional Final Provisional Provisional Provisional CPI (combined) 100.00 4.4% 4.2% 4.2% 3.6% -0.2% 4.1% Food & beverages 45.86 4.1% 3.7% 3.7% 2.6% -0.7% 4.9% Cereals & products 9.67 4.3% 4.4% 4.4% 4.9% 0.8% 4.0% Meat & fish 3.61 5.8% 6.2% 6.2% 5.8% 0.0% 2.1% Egg 0.43 9.9% 9.4% 9.5% 8.6% 1.4% 5.9% Milk & products 6.61 4.3% 4.4% 4.4% 4.6% 0.2% 3.8% Oils & fats 3.56 4.7% 3.8% 4.0% 2.7% 0.2% 3.1% Fruits 2.89 6.0% 4.4% 4.4% 4.5% -0.4% 6.3% Vegetables 6.04 -7.1% -5.7% -5.7% -10.3% -6.0% 9.5% Pulses & products 2.38 14.3% 4.1% 4.1% 0.2% -0.3% 4.4% Sugar & confectionary 1.36 25.9% 23.6% 23.6% 22.4% 0.1% 13.2% Spices 2.50 8.1% 7.4% 7.4% 6.5% 0.3% 4.3% Pan, tobacco & intoxicants 2.38 6.8% 7.1% 7.0% 6.3% 0.1% 4.0% Clothing & footwear 6.53 5.2% 5.2% 5.2% 5.0% 0.4% 3.4% Housing 10.07 5.2% 5.1% 5.1% 5.0% 0.3% 3.4% Fuel & light 6.84 3.1% 2.8% 2.9% 2.8% 0.6% 2.1% Miscellaneous 28.32 4.5% 4.6% 4.7% 4.8% 0.3% 3.8% Household goods & services 3.80 4.3% 4.4% 4.4% 4.2% 0.2% 2.8% Health 5.89 4.7% 4.7% 4.7% 4.5% 0.2% 2.8% Transport & communication 8.59 2.7% 3.4% 3.4% 3.8% 0.4% 4.3% Recreation & amusement 1.68 3.9% 4.0% 4.0% 4.0% 0.4% 2.8% Education 4.46 4.9% 5.2% 5.2% 5.1% 0.3% 4.6% Personal care & effects 3.89 7.7% 7.2% 7.2% 7.7% 0.4% 4.5% CPI-Food 36.55 3.9% 3.3% 3.3% 2.1% -0.8% 5.0% CPI-Core 47.30 4.9% 4.9% 5.0% 5.0% 0.3% 3.7% CPI Rural 5.0% 4.8% 4.8% 4.1% -0.1% 4.4% CPI Urban 3.6% 3.5% 3.5% 3.0% -0.2% 3.7% *Buildup with reference to March 2016 Source: Central Statistics Office (CSO); ICRA research

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Chart 1: Composition of CPI Inflation (YoY)

Source: CSO; ICRA research Chart 2: Composition of Food & Beverages Inflation (YoY)

Source: CSO; ICRA research

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Food & beverages Pan, tobacco & intoxicants Clothing & footwear Housing Fuel & light Miscellaneous CPI-Combined

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Cereals and products Protein Items Vegetables Balance CPI Food & Beverages Inflation

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Chart 3: MoM Change in Food & Beverage Sub-Index in November 2015 and November 2016 (YoY)

Source: CSO; ICRA research

Chart 4: Headline and Core CPI Inflation (YoY)

Source: CSO; ICRA research

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Food & Beverages

Vegetables Pulses & products

Fruits Meat & fish Egg Milk & products Oils & fats Non-alcoholic beverages

Cereals & products

Spices Prepared meals & snacks

Sugar

Nov-15 Nov-16

0%

2%

4%

6%

8%

10%

12%

CPI Core-CPI

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Chart 5: Rural CPI Inflation and Rural Wage Growth (YoY)

Source: Centre for Monitoring Indian Economy; CSO; ICRA research Chart 6: Rural and Urban CPI Inflation (YoY)

Source: CSO; ICRA research

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

Rural Wage Rural-CPI

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Urban Rural Combined

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ANNEXURE Chart 7: CPI Inflation (YoY) Chart 8: Food & Beverages Inflation (YoY)

Source: CSO; ICRA research

Chart 9: Vegetables Inflation (YoY) Chart 10: Fuel & Light Inflation (YoY)

Source: CSO; ICRA research

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Combined Rural Urban

0%

2%

4%

6%

8%

10%

12%

Combined Rural Urban

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Combined Rural Urban

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Combined Rural Urban

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Chart 11: Housing Inflation (YoY) Chart 12: Clothing & Footwear Inflation (YoY)

Source: CSO; ICRA research Chart 13: Miscellaneous Inflation (YoY) Chart 14: Transport & Communication Inflation (YoY)

Source: CSO; ICRA research

0%

2%

4%

6%

8%

10%

12%

14%

16%

Combined/Urban

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Combined Rural Urban

0%

1%

2%

3%

4%

5%

6%

7%

8%

Combined Rural Urban

-6%

-4%

-2%

0%

2%

4%

6%

8%

Combined Rural Urban

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