December 13, 2016 06:00 CST

Consensus Actual Previous
Change Y/Y 3.9% 3.63% 4.2%

Headline CPI inflation in India fell to 3.63 percent in November from 4.2 percent in October, below the consensus forecast for a smaller fall to 3.90 percent. Inflation has fallen for four consecutive months after peaking at 6.07 percent in July and is now below the mid-point of the Reserve Bank of India's target range of 2.0 percent to 6.0 percent. In month-on-month terms, the consumer price index fell 0.15 percent in November, after increasing by 0.38 percent in October.

Food price inflation continued to weaken in November, falling for the fourth consecutive month from 3.32 percent in October to 2.11 percent. The price of vegetables fell particularly sharply, down 10.29 percent on the year after a fall of 5.74 percent in October, with the inflation rate also falling for pulses from 4.11 percent to 0.23 percent.

Changes in inflation rates in other categories of consumer spending, however, were generally small. Inflation fell from 5.24 percent in October to 4.98 percent in November for clothing and footwear, while inflation in housing costs fell from 5.15 percent to 5.04 percent. Fuel and light inflation was flat at 2.80 percent, while inflation was also little changed for education and recreation and amusement and rose for transport and communication.

Inflation in urban areas fell from 3.54 percent in October to 3.05 percent in November, while inflation in rural areas fell from 4.78 percent to 4.13 percent.

The government's decision early November to withdraw high-denomination currency notes as legal tender likely contributed to the bigger-than-expected fall in inflation. Cash transactions play an extremely important role in the Indian economy, and cash shortages have already lead to significant disruption and uncertainty. Some of the fall in food prices, in particular, is reported to have been the result of distress sales by suppliers to clear stocks of perishable goods. Respondents to PMI surveys have also cited cash shortages as a factor driving weaker price pressures in November.

The RBI last week decided to leave policy rates on hold despite widespread concerns about the economic impact of the currency decision, with officials arguing that this impact may be relatively short-lived. Today's inflation data suggest that the impact on prices has so far mainly been on perishable food items, which officials may interpret as supporting their assessment. Although inflation is still close to the mid-point of the RBI's target range, should incoming data indicate a more protracted disruption to economic activity officials may reassess the need for a cut to policy rates at their next meeting in February. An unscheduled policy move is also possible, with the RBI delivering two unscheduled rate cuts last year.

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.