The core CPI (Consumer Price Index) inflation may have come in at 3.2% in April, but going forward it may only increase as prices of several commodities, including crude oil and metals have started to rise, say economists. A likelihood of an uptick in core inflation is likely to push the rate cuts possibility to Q3 of the current fiscal year, they say.
“Food inflation in India is being a bit sticky, and weather-related concerns remain on the radar, making no room for easier monetary policy in the near term,” said Dhiraj Nim, economist, ANZ Research. “Rising commodity prices add to that challenge, especially when core inflation will likely bottom out in Q2 and start rising again,” he said. Nim expects the first rate cut to now take place in December 2024, as against August 2024 earlier. Currently, the repo rate stands at 6.5%.
Core inflation–which has stayed at 3.2% for two consecutive months–is expected to average around 3.5-3.7% in H1 FY25, and 4.5% in H2, according to economists.
The Reserve Bank of India aims to keep the headline retail inflation rate at 4% on a durable basis. According to its projection, CPI inflation is expected to average 4.5% in FY25. But continued pressures from food items, and emerging risks on the core front, pose an upside risk to the forecast.
In April, the index of core inflation – which excludes food and fuel components – was up 0.6% on month. The sequential rise was the highest in 12 months, and going forward, the trend may continue.
As per an ICICI Bank note, the goods and services inflation which remained contained at 3.2% and 2.8% respectively in April, should start increasing now on the back of higher global commodity and metal prices.
In April, the manufactured products index within the Wholesale Price Index (WPI) recorded a sequential rise of 0.5%, the highest month-on-month uptick in two years. This was mainly led by sharp rise in prices of basic metals – up 1.2% month (highest increase recorded in seven months).
Bank of Baroda’s Chief Economist Madan Sabnavis said that core inflation, which has been under control so far, can spring an upward surprise as companies have raised prices of their products. “This holds in the consumer goods segment as they have held back price increases for over a year.”
Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership said: “Higher commodity prices may feed into core goods, but that story will play out with a lag.” Upadhyay expects core inflation to average 4% in FY25. In FY24, it averaged 4.3%.
The RBI’s monetary policy statement for April had said that after witnessing sustained moderation, “cost push pressures” faced by firms are showing “upward bias”.
“The recent firming up of international crude oil prices warrants close monitoring. Geo-political tensions and volatility in financial markets also pose risks to the inflation outlook,” it had said.