Nomura projects inflation to "drift gradually higher" in new CPI series

New Delhi [India], January 14 : India's inflation trajectory is set for a technical shift as a new Consumer Price Index (CPI) series prepares to debut in February, marking the end of the outgoing 2012-based series that closed December with a modest rise. Nomura, in its latest report, expects CPI inflation to "drift gradually higher in the coming months" following the transition to a 2024 base year. This overhaul includes updated weights that prioritise core categories over staple foods and introduces significant methodological upgrades to data collection.

According to the Nomura report, December's headline inflation rose to 1.3 per cent year-on-year from 0.7 per cent in November. While this figure fell below consensus expectations, the uptick was driven by easing food price deflation and the fading of favourable base effects.

Food and beverages continued to see deflation by 1.8 per cent, though this was an improvement from the 2.8 per cent decline recorded in the previous month. Subdued prices for vegetables, fruits, and pulses kept the overall headline figure underwhelming despite price increases in eggs and meat.

The report highlights a growing divergence between headline and underlying inflation. Core inflation rose to 4.6 per cent in December from 4.3 per cent in November, but the report notes this was "primarily owing to higher gold and silver prices." Together, these precious metals added approximately 0.8 percentage points to the headline CPI and 1.8 percentage points to core CPI.

Excluding these volatile effects, core inflation remained stable at 2.4 per cent, while "super core" inflation, which excludes commodities like gold, silver, petrol, and diesel, slid to a 3-month seasonally adjusted annualised rate of 0.9 per cent.

The upcoming February 12 release of the new CPI series is expected to result in a "largely technical" rise in headline inflation of about 0.3 to 0.4 percentage points. The new series will reflect the 2023-24 Household Consumption Expenditure Survey, increasing the weighting for core items while reducing the impact of staple foods like cereals and vegetables.

Nomura stated that this change "should lower the volatility of headline inflation, as food inflation has been the primary driver of the large fluctuations." The update also expands the basket to include streaming services, consumer tech, and app-based transport.

Regarding monetary policy, Nomura believes the Reserve Bank of India (RBI) will prioritise policy transmission and liquidity management in the immediate term. Following a 25 basis point cut in December to 5.25 per cent, the report suggests "the easing cycle is not over," even as the focus shifts.

Nomura expects the RBI "to pause in February with a final 25bp cut in April, taking the terminal rate to 5.00%," as underlying inflation is likely to stay benign despite the technical rise in headline figures.

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