Inflation continued to decrease in October coming up to its lowest level in last three months. Not only this, core inflation fell by around 200 basis points to a 43-month low from its recent peak in January 2023. The monetary policy has been proactively targeting inflation and it seems to be doing good to bring the inflation back into the tolerable limits in the economy. Besides, there has been sustained deflation in wholesale prices indicative of softening of input costs. Wage and rental pressures also remain muted. Fuel group prices have also been decreasing.
Wholesale Price Index shows negative rate of inflation on Y-o-Y and Monthly basis
According to the recent data released by the Ministry of Commerce & Industry the Wholesale Price Inflation (WPI) has recorded negative growth rate of 0.52 per cent (based on the year 2012 prices) for the month of October as compared to October, 2022 and is even lower than a negative growth rate of 0.26% recorded in September, 2023. The year to year negative growth rate is largely due to fall in prices of certain manufactured articles as compared to the corresponding month of previous year. The Wholesale Price Index has weighted various commodity groups as under:
Since the manufactured products are weighted higher than primary articles and fuel, a decline in WPI generally indicates decrease in commodity prices of industrial products.
Past three months trend in most commodities groups is showing decline in inflation
The index numbers and inflation rate for the last three months of all commodities and WPI components are as under:
We observe that the average WPI for Primary Articles is higher than the overall WPI even as their weight in the much less than the manufactured item on y-o-y basis.
However, it is clearly observed that in case of Primary articles the rate of increase in inflation has been reducing, but, the rate of decrease in Fuel and Power and manufactured goods, it is slowing down. (Refer Chart below)
Month-over-Month Change in Major Groups of WPI
In case of the Primary Articles the index increased by 1.15% to 184.5 (provisional) in October, 2023 compared to 182.4 (provisional) for the month of September, 2023. Prices of Minerals (7.81%) and Food Articles (1.33%) increased in October, 2023 as compared to September, 2023. However, the prices of Crude Petroleum & Natural Gas (- 0.60%) and Non-food Articles (- 0.24%) are observed to be lower in the month of October, 2023 as compared to September, 2023.
In the category of Fuel & Power the index increased by a meagre 0.65% to 154.1 (provisional) in October, 2023 from 153.1 (provisional) in the month of September, 2023. Further, Prices of Mineral Oils increased by 1.28% in October, 2023 as compared to September, 2023. Prices of Electricity were observed to be lower by 0.73 percent in October, 2023 as compared to September, 2023.
Under Manufactured Products the index remained constant at 140.3 (provisional) in October, 2023 and September, 2023. Out of the 22 NIC two-digit groups for manufactured products, 13 groups witnessed an increase in prices, 7 groups witnessed a decrease in prices whereas 2 groups remained unchanged.
Some of the important groups that showed month-over-month increase in prices are manufacture of food products; chemicals and chemical products; motor vehicles trailers & semi-trailers; textiles; other non-metallic mineral products, etc. Some of the groups that witnessed a decrease in prices in October, 2023 as compared to September, 2023, are manufacture of basic metals; fabricated metal products, except machinery & equipment; rubber & plastic products; other transport equipment, etc.
However, if we compare the decrease in WPI in regard to the last year, interestingly, the negative inflation rate in October, 2023 is primarily due to fall in prices of chemicals and chemical products, electricity, textiles, basic metals, food products, paper and paper products, etc. as compared to the corresponding month of previous year. Hence the prices in some of the commodity groups may have increased in comparison to the last month yet they are lower than the last year.
Retail inflation is also soothing down
According the provisional data for the month of October 2023 released by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), All India Inflation rates (on point-to-point basis i.e., current month over same month of last year, i.e. October 2023 over October 2022), based on 2012 prices are given in the following Chart which contains General Indices (CPI) and Consumer Food Price Indices (CFPI):
This data is indicating that the Consumer Price Index is lower than previous year and previous month indices. This is a good sign as the CPI is coming within the RBI’s tolerable limits which is 4 and 6 percent on either side. The Consumer Food Price Index also, is receding yet the rate of fall is much slower and is still above 6 percent exerting upward pressures on the overall CPI thus. Hence it will be a challenge to keep food prices at lower than at least 6 percent such that the pressure on the CPI is released further.
RBI raises risk weight on unsecured lending by commercial banks and NBFCs
Quite recently, the Reserve Bank of India has hiked risk weights on unsecured bank and NBFC loans by 25%. This is going to increase the burden on both the Banks and the NBFCs and may affect their margins. The RBI finds it necessary considering the unprecedented growth in unsecured retail loans and the consequent concerns regarding rising systemic risk. This includes the credit card purchases as well. The implication of this new rule is that now the banks and NBFCs need to keep aside more capital while lending as they risk weights are increased from 100 to 125 for such loans. The RBI hopes that they would tend to be more calibrated while lending and it may act as a safeguard against aggressive growth.
The demand for loans secured by house, education, vehicle loans and gold and gold jewellery would not attract higher risk weights. For all other types of loans, the credits growth rate may slow down a bit for tightly capitalized banks and NBFC’s as this may affect their capacity to go for aggressive lending strategies in the case of unsecured loans. It may be interesting to observe its impact on inflation which is already in the negative zone for the manufactured goods.
Liquidity Crunch faced by the Indian Banking system is another challenge to reckon with
India’s banking sector is reported to be grappling with a severe liquidity deficit to the tune of ₹1.74 lakh crore. The main reasons are as under:
- Significant Goods and Services Tax (GST) dues
- Increase in corporate advance tax payments
- Recent bond auctions.
- Withdrawals through the Incremental Cash Reserve Ratio (I-CRR), which reportedly reduced available funds by approximately ₹1 lakh crore.
- RBI’s efforts to stabilize the fluctuating Rupee
The liquidity deficit had recently escalated to ₹1.77 trillion, which was quite close to the five years record level of ₹1.86 trillion (December, 2018). This has reflected in the interest rates, with the weighted average call rate and the Triparty Repo Dealing and Settlement (TREPS) rate overshooting RBI’s Marginal Standing Facility (MSF) rate of 6.75%. This liquidity crunch, however, is expected to ease out due to upcoming government bond redemptions worth ₹891 billion due in the coming week, alongside projected government spending.
It is thus expected that the inflation shall remain within the targeted range in the short term. However, bringing food inflation back in the targeted range shall continue to be a challenge to reckon with.