India’s retail inflation, based on the Consumer Price Index (CPI), is expected to ease further in July and August 2024 after it fell to 4.75 per cent in May from 4.83 per cent in April. Economists also maintained FY2025 average inflation estimate at around 4.4 per cent. Earlier, data released by the National Statistical Office (NSO) showed that CPI inflation fell to a 12-month low of 4.75 per cent in May from 4.83 per cent in April, mainly due to the high base effect and easing food prices.
Favourable monsoon forecast to offer comfort
Dipti Deshpande, Principal Economist, CRISIL, said, “The southwest monsoon has arrived on time and now its progress will influence how food inflation moves over the next few months. Food inflation has stayed above 8.5 per cent for four months now. In May, seasonal pressures kept it at 8.7 per cent, unchanged from April. Inflation in cereals rose higher, while it was rigid for vegetables. Pulses, on the other hand, rose unexpectedly after easing for 4 months. Non-food inflation continues to offer respite, printing at a record low of 2.3 per cent. From June, we expect some softening as a supportive base will help bring down food inflation. Further easing will depend on the distribution of rainfall. For this fiscal, we expect inflation to average 4.5 per cent, assuming softer food and benign non-food inflation.”
Kotak Institutional Equities maintained its FY2025 average inflation estimate at around 4.4 per cent.
Nish Bhatt, Founder & CEO, Millwood Kane International, said, “With the government in place and the election anxiety subsiding, inflation should be contained thanks to the favourable monsoon forecast and probable increase in kharif output. But the uncertainties surrounding high food inflation and crude oil movements need to be monitored as it can have adverse impact on household inflationary expectations.”
The Southwest Monsoon has seen an early onset in Kerala (June 1) and Northeast India (June 5) by two and six days, respectively, over the normal onset date. The rain marks the commencement of its four-month sojourn which brings in 75% of the country’s annual rainfall. “Nevertheless, adequate volume and dispersion of rainfall in the season remain key to improve the prospects for kharif crop and replenish the reservoir levels, which would be crucial to support the rabi crop, and rein in food prices,” said Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA Ltd. ICRA estimates food and beverages inflation to ease somewhat in June 2024 vis-à-vis the May 2024 print, while remaining elevated above the 7.0 per cent mark in the month. “This would help contain the headline CPI inflation print at sub-5.0 per cent in June 2024. Thereafter, a favourable base is expected to lead to a sharp albeit temporary fall in the CPI inflation to 2.5-3.5 per cent in July 2024 and August 2024,” Aditi Nayar added.
MPC to start cutting rates in December 2024
Barclays, meanwhile, projected June CPI inflation at 4.5 per cent, driven lower in part by a high base. Shreya Sodhani, Regional Economist, Barclays, said, “Taking the data and early price indicators for June into account, we are tracking CPI inflation for June at 4.5 per cent YoY, driven lower in part by a high base. Prices of vegetables are likely to rise further in the near term, partly offset by moderation in core and deflation in fuel prices. Still, very strong base effects will likely pull headline inflation materially lower between June and August. Notwithstanding this base effect-induced moderation, we expect inflation to align towards the target only after Q3 FY25. Thus, we expect the MPC to monitor monsoon season effects and the corresponding trajectory of food inflation. Amid increased comfort over growth, we see a window for rate cuts opening only in December 2024, with a risk of further delay if growth remains on a strong footing.”
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), on June 7, decided to keep the repo rate unchanged at 6.5 per cent. The MPC also revised its GDP growth forecast upwards from the earlier 7 per cent estimate to 7.2 per cent for the financial year 2024-2025. It also decided to remain focused on withdrawal of accommodation to ensure that inflation does not accelerate, while supporting growth.
Although the continued moderation in core inflation along with forecasts of normal monsoon remains a key positive, the delayed rate cut cycle in the US with the RBI’s vigil on food inflation may push the rate cycle in India to Q4FY25. Elara Securities expects the MPC to cut rates by 25bps in Q4FY25E. Meanwhile, food inflation remains the primary risk to inflation outlook in FY25. “Despite easing inflation trajectory, the headline print remains above 4 per cent, with the past three months’ headline CPI averaging 4.8 per cent YoY. When seen in conjunction with consistent YoY food and beverages inflation, there remains a lingering threat that inflation may turn sticky as inclement weather conditions prevail. Monsoons may offer comfort but concerns over its spatial distribution and predictability also loom. In this context, we expect the transition to rate cut cycle to be slow, with a change in stance in Q3FY25 and the first rate cut in Q4, as the MPC maintains an unwavering focus on durably maintaining the 4 per cent inflation target,” said Garima Kapoor, Economist and Senior VP, Elara Securities.
Furthermore, on June 12, The Federal Reserve held interest rates steady and pushed out the start of rate cuts to perhaps as late as December. An “asynchronous global monetary policy cycle” will encourage the RBI to be in a wait-and-watch mode. Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said, “The Fed has revised down its rate-cut expectations to one in CY2024. This would reduce any pressure on the RBI to take cues from the global monetary policy cycle and continue to focus on India’s disinflation process. Based on our domestic and global economic conditions expectations, we maintain our call for a shallow rate cut cycle (75-100 bps) from the December policy and stance changing either in October or along with the rate action.”
Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said, “The decline in core inflation to 3.1 per cent is good news for the MPC. This paves the way for rate cut by the RBI earlier than expected if the Fed also turns dovish.”
Suman Chowdhury, Chief Economist & Head of Research, Acuité Ratings & Research Limited, added, “Policmakers will continue to derive comfort from the core CPI inflation (excluding all food and fuel components) which dropped further to 3.3 per cent in May’24. Nevertheless, we expect RBI to maintain the status quo on the monetary policy till the third quarter given the strong growth momentum in the economy and the uncertainty on rate cuts in the developed economies.”
Now, what is CPI inflation?
The consumer price index or CPI is a metric used to measure inflation or the change in the price level of goods consumed by retail consumers, who are on the demand side of the economy. For the same reason, it can be interpreted that CPI measures the purchasing power of an economy’s currency.
Now, a key component of overall inflation is vegetable inflation. In India, vegetables like onions, tomatoes and potatoes have a weightage of 7.46 per cent in the overall Consumer Price Index (CPI), which tracks the prices of a host of goods and services to determine the overall consumer inflation in the country.
According to a CRISIL MI&A Research estimates, the cost of home-cooked non-veg thali declined by 7 per cent in May, while that of veg thali became dearer by 9 per cent on-year during the same month. The cost of non-veg thali declined due to an estimated drop of approximately 16 per cent in the prices of broiler year-on-year on a high base of last fiscal. Meanwhile, the price of veg thali increased due to a surge of 39 per cent in tomato prices, 41 per cent in potato prices and 43 per cent in onion prices on-year, largely because of the low base of last fiscal. Lower onion arrivals on account of a significant drop in rabi acreage coupled with a decline in potato arrivals on account of the adverse impact of late blight and crop damage in West Bengal contributed towards the increase in prices, Crisil said. The prices of cumin, chilli and vegetable oil fell by 37 per cent, 25 per cent and 8 per cent, respectively, preventing a further increase in the cost of the veg thali.
While the CPI reflects the change in retail prices of goods and services typically purchased by households and affects consumers, the WPI reflects changes in the wholesale prices of commodities sold in bulk at the first stage of the transaction, impacting manufacturers.