CPI complicates, Exports spike and FX reserves fall...
This Week In Data #101
In this edition of This Week In Data, we discuss:
Jump in October CPI and implications for monetary policy
Exports spike in October and trade deficit narrows but likely one-off
FX Reserves fall for the 6th consecutive week
Headline CPI Inflation accelerated to a 14-month high of 6.2% in October, 70bps higher than in September. This was largely due to a 130bps uptick in food inflation. Food inflation rose to 9.7% YoY, the highest since last July. Core inflation also ticked up 3.7% YoY from 3.5% and it is now the highest since December last year. CPI Inflation is now above the upper limit of the target range set out for the RBI, for the first time since August last year.
That said there is still some good news in the inflation data.
Firstly, this uptick was expected. Although the magnitude was higher than generally expected).
Second, the increase in food inflation is not broad-based. Just three categories – Fruits, Vegetables, Oils & Fats –have seen an increase in inflation. Inflation in other food categories has either remained stable or even moderated.
Third, despite the uptick, core inflation remains fairly low in absolute terms – October was the 11th consecutive month of sub-4 % print. And the core-core CPI, which excludes retail fuel and precious metals, has remained stable for the past couple of months.
Recall what we discussed last week – that growth is moderating, and that the 2Q GDP print due later this month could be closer to 6-6.5%. This (both in anticipation and post facto) will result in an across-the-board downgrade to full-year growth estimates. The downgrade will be particularly severe for the RBI whose current estimate is for GDP to grow over 7% in the current year. Now normally, in an environment of slowing growth, one would expect the RBI to be cutting interest rates. But the latest CPI print of over 6% complicates that.
Now, given that the increase in CPI is not broad-based, the CPI will moderate and fall back below 6% in November or December. But the November CPI data will come after the next MPC meeting which is scheduled for early December. And even if the CPI falls below 6%, the inflation for the December quarter will average above 5%, and it will be 1ppt above the September quarter. So, for the RBI and the MPC, there is now a real trade-off between growth and inflation. Growth is moderating and while inflation will moderate you are never sure about food inflation. If the MPC has to err, what side should it err on – protecting growth or containing inflation? No easy options before the MPC when it meets in December.
India’s exports rose 17% YoY in October as per the quick estimates. This comes after a negative or single-digit growth for the past 7 consecutive months and is the strongest growth since June 2022. This was driven by a sharp uptick in exports of Chemicals, Engineering goods, Electronics goods and Ready-made garments and was offset by a 22% decline in Petroleum exports. Petroleum exports have declined for 5 consecutive months.
Imports however rose by a modest 4% YoY in October, and this is the third consecutive month of low single-digit growth in imports. Consequently, the trade deficit narrowed sharply in October on a YoY basis. There is a bit of seasonality in export growth with the mismatch in the timing of the festival season. And thus, YTD numbers better portray the underlying trends. Accordingly, exports have increased by a modest 3% YoY till October while imports have increased by almost 6% YoY. The trade deficit has increased by 15% YoY as of October and is on track to cross US$250bn for the full year.
Lastly, FX Reserves. India’s FX reserves declined by US$7bn in the first week of November. This is the sixth consecutive week of decline in FX reserves during which they have declined cumulatively by almost US$30bn.
This is not surprising given the large outflows by FPIs from the equity markets. What this does underscore though is that the rupee would have seen a sharper decline but for this intervention from the RBI. The RBI’s intervention links back to inflation since the currency is an important driver of core inflation, especially on the goods side.
That’s it for this week. For the folks in Mumbai, a gentle reminder to go out and vote on Wednesday.