While India’s retail inflation rose to a four-month high of 5.08 per cent in June on higher food costs, economists expect it to ease in the coming months as rainfall has regained momentum. Shreya Sodhani, Regional Economist, Barclays, said, “Taking the data and early price indicators for June into account, we are tracking CPI inflation for July at 3.0 per cent YoY, driven lower in part by a high base. Food prices are likely to increase next month, though we expect the momentum in vegetables to ease.” Barclays also maintained FY25 average inflation estimate at 4.3 per cent.
Earlier, data released by the National Statistical Office (NSO) showed that CPI inflation accelerated to 5.08 per cent on an annual basis in June. This, it added, is higher than the 12-month low of 4.75 per cent registered in the previous month. Food inflation, which accounts for around half the overall CPI basket, rose to 9.55 per cent in June from 8.69 per cent in May and 4.55 per cent in June 2023. Dharmakirti Joshi, Chief Economist, CRISIL, said, “The CPI-based inflation for June corroborates the Mint Road position that the last mile of disinflation remains a challenge. The gauge printed at 5.1 per cent for June, compared with 4.8 per cent in May as food remained pricey. Notwithstanding a supportive base effect from last year, food inflation surged to 9.4 per cent due to pricier vegetables, cereals, milk and fruits. Vegetables inflation, which has remained in double-digits for eight months now, is a major worry as is rigidity in foodgrains inflation.”
The inflationary impact is felt more acutely in rural areas, where CPI hit 5.66 per cent compared to 4.39 per cent in urban areas. “This disparity underscores the broader economic strain, with higher food prices significantly pinching rural households and potentially suppressing rural demand,” stated a report by Prabhudas Lilladher.
Pick up in monsoon to bring relief
The June retail inflation was pushed up by increase in prices of vegetables and fruits amid heatwave in many parts of the country and also a weak start of the southwest monsoon during the month. However, with rainfall gaining momentum, the vegetable prices are expected to cool down over the next 2-3 months. “A weak start to the southwest monsoon in June and prolonged heatwave impacted vegetable prices, in turn pushing food and beverages inflation back above 8 per cent. Encouragingly, rainfall has regained momentum into the crucial month of July, allaying supply concerns. Vegetables also have a short crop cycle, helping to make related price pressures less pervasive. July-August inflation will benefit from favourable base effects, but the pullback will be shallower than previously anticipated on still elevated vegetables and telecom tariff hikes by local providers,” said Radhika Rao, Executive Director and Senior Economist, DBS Bank.
Vegetable prices have risen to 27.33 per cent in the previous month due to the continuing summer heat waves in some parts of the country. “While we expect the vegetable prices to cool down over the next 2-3 months with the expected progress in the monsoon, it is difficult to predict the trajectory of food inflation in India at this stage. While the average CPI inflation in Q1FY25 has been less than 5 per cent in line with RBI estimates, there is an upside risk on inflation in the subsequent quarters which will continue to keep RBI cautious,” said Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research.
Dharmakirti Joshi said, “Although June rains were deficient, it is not a major concern because July and August rains are what matter for kharif. We expect the progress on monsoons and pick up in sowing to improve agricultural output and cool off food inflation in the coming months.” Now, non-food inflation eased for the seventeenth straight month, sliding to a low 2.3 per cent. That said, he added that core inflation, which is the dominant part of non-food inflation, could see an upside in the coming months due to the recent firming up in international freight costs, crude prices and hikes in domestic telecom prices. “Net-net, we expect a decline in food inflation in the coming months to drag down headline inflation to an average of 4.5 per cent,” he added.
Sanjeev Agrawal, President, PHD Chamber of Commerce and Industry, also added, “Going ahead, we expect the food prices to stabilise in the coming months and inflation trajectory also to soften and stabilise between 4- 4.5 per cent.”
Vivek Rathi, National Director Research, Knight Frank India, said, “Barring the food basket, inflation is indicating signs of bottoming out broadly across the non-food categories, also seen in the inflation in the core categories averaging at 3.5 per cent in the last six months. A stable monsoon will play an important role in stabilising food prices and inflation levels over the next few months.”
MPC to start rate cut cycle not before December 2024
An inflation print of +5 per cent, albeit seasonal, will likely keep the Reserve Bank of India Monetary Policy Committee (MPC) more hawkish and any decision to cut rates will not come before December 2024, say economists. Shreya Sodhani from Barclays, said, “July is likely to see a larger sequential increase in core inflation than seen in recent times with a seasonal pick-up in housing prices combined with the implementation of higher telecom prices from July. Annual inflation is likely to be low through Q2FY25, driven by base effects. We expect the MPC members to look through this and monitor monsoons and the corresponding trajectory of food inflation. Amid increased comfort over growth, we see a window for rate cuts opening only in December 2024. We highlight the risk of further delay if growth remains on a strong footing or if the inflation surge is higher than expected by the bank.”
This is in line with RBI Governor Shaktikanta Das’ statement wherein he continue to sound hawkish and said, “We are very optimistic and quite confident that we are moving towards 4 per cent inflation, but it is moving slowly.”
Analysts at Prabhudas Lilladher also said that the RBI is likely to maintain its pause stance well into December 2023, “cautiously observing these inflationary pressures and assessing the broader economic impact of the previous 250 basis points rate hike”.
Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Asset Management, said, “The rise can be primarily attributed to high food inflation, which came in at 9.36 per cent. While core remains at 3.10 per cent, the high headline number does not bode well for markets. We believe RBI will continue to maintain a cautious approach and there might be a 3-5 bps sell-off in markets.”
Earlier in June, the US Federal Reserve had announced to keep its key interest rate unchanged while signalling one rate cut expected before the end of the year. Suman Chowdhury from Acuité Ratings & Research, however maintained that despite the likelihood of a Fed rate cut having increased for September 2024, RBI is not expected to go for any monetary easing measures till December 2024.
Nikhil Gupta, Chief Economist, MOFSL Group, said, “Overall, slightly higher headline inflation, led by vegetables, and better IIP growth together push the rate cut hopes by the RBI further down. However, an easing of inflation to <4 per cent in Q2FY25 and a cut by the US Federal Reserve in as early as July-end, may fuel the market expectations in India as well. We don’t see the RBI cutting rates in CY24.”