India April Inflation - Trajectory sharply lower with CPI within RBI's tolerance band and WPI contracting

As I have been writing in the past few posts, the trajectory of inflation is lower. 

If you think about it, Inflation is nothing but percentage change in prices paid over the prior period. With the disruption caused in prices of energy and other commodities post Russia - Ukraine War and subsequent sharp declines, the base effect helps bring the headline print lower.

For the month of April, the headline CPI rose 4.76% yoy while the core CPI which had been sticky around the 6% declined to 5.20% yoy. Both the numbers bring much needed comfort to the RBI. Sequentially, fuel and lighting declined mom while all other categories showed mom increases.

With the April month's release, CPI inflation is projected to come in at 3.93% for March 2024 and remain closer to the 4% level for FY 25. My own estimates are lower than RBI projections of 5.20% by Q4 FY 24. My estimates call for a average inflation reading of 4.42% for FY 24.  If RBI inflation numbers evolve as per guidance, then by Q4 FY 24, real rates will be positive a 130 bps. 

The risk to the above outlook comes from weather related disruptions which could see sharp rise in agricultural commodities.

Data for WPI Inflation released today showed prices contracting 0.92% yoy after reaching a peak of 16.63% in May 2022. The negative reading in WPI was on account of a 2.42% contraction in prices of the manufactured products which have a weight of 64.20% in the index. Both primary articles and fuel and power were seen higher yoy with primary articles up 1.60% yoy and fuel and power up 0.93% yoy.

Divergence between CPI and WPI data had hit peak levels in June 2022 which is now gradually correcting and WPI is sharply lower than CPI numbers.

The developments on the inflation front bode well for the markets.

1Y OIS rates has been supported at the 6.50% and the 5Y at 5.90% with markets starting to price in rate cuts starting end of 2023.