October 13, 2016 07:00 CDT

Consensus Actual Previous
Change Y/Y 4.8% 4.31% 5.05%

Headline CPI inflation in India fell to 4.31 percent in September from 5.05 percent in August, sharper than the consensus forecast of a fall to 4.80 percent. After inflation spiked from 4.83 percent in March to 6.07 percent in July, this moderation in price pressures over the last two months is consistent with the Reserve Bank of India's assessment that CPI inflation will stay within its target range of 2.0 percent to 6.0 percent over the near-term.

Just as the move up in inflation earlier this year was driven by higher food prices, lower food price inflation was the main factor driving the recent fall in the headline rate. Close-to-normal rainfall during the annual monsoon season helped food inflation fall from 8.35 percent in July to 5.91 percent in August, and this rate fell further to 3.88 percent in September. This is the smallest annual increase in food prices since August 2015.

Inflation rates in other categories of consumer spending were mixed. Inflation fell slightly from 5.21 percent in August to 5.19 percent in September for clothing and footwear, rose from 2.49 percent to 3.07 percent for fuel and electricity, and fell from 5.29 percent to 5.18 percent for housing. Inflation in urban areas fell from 4.22 percent in August to 3.64 percent in September, while inflation in rural areas fell from 5.87 percent to 4.96 percent.

The Reserve Bank of India last week reaffirmed its forecast that headline CPI inflation will settle around 5.0 percent by the end of the fiscal year in March 2017. Officials also argued that upside risks to this forecast had eased since the previous policy decision in August, and that this had "opened up space" for the easing of policy announced last week.

The September inflation data released today will likely strengthen the RBI's confidence that inflation is on track to stay within its target range over coming months. This suggests that officials will be reassured that last week's decision to cut policy rates was justified. Should inflation fall further in the next few months, officials may also conclude that there is scope to cut rates again.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Within the overall CPI basket, food (47 percent) has easily the largest weight of any of the major components and a separate consumer foods price index is also released. Monthly and annual changes in the CPI provide widely used measures of inflation and the latter is the policy target of the Reserve Bank of India (RBI).

CPI numbers are widely used as a macroeconomic indicator of inflation, as a tool by governments and central banks for inflation targeting and for monitoring price stability, and as deflators in the national accounts. CPI is also used for indexing dearness allowance to employees for increase in prices. CPI is therefore considered as one of the most important economic indicators.

CPI numbers presently compiled and released at national level for India reflect the fluctuations in retail prices pertaining to specific segments of population in the country -- industrial workers, agricultural labourers and rural labourers. These indexes do not encompass all the segments of the population in the country and as such do not reflect true picture of the price behavior in the country. To overcome the above, the Central Statistics Office (CSO) of the Ministry of Statistics and Programme Implementation has started compiling new series of CPI for the entire urban population or CPI (Urban) and CPI for the entire rural population or CPI (Rural), which reflect the changes in the price levels of various goods and services consumed by the urban and rural population.