India’s retail inflation, based on the Consumer Price Index (CPI), plunged to a 59-month low of 3.54% in July, due to the statistical effect of a high base, data released by the National Statistical Office (NSO) showed on Monday. In July 2023, the CPI inflation was 7.44%, a 15-month high.
High base also pulled down food inflation, with Consumer Food Price Index (CFPI) falling to a 13-month low of 5.42% in July. In the year ago period, food inflation stood at 11.51%.
On a sequential basis, however, the overall index rose by 1.4% in July, the highest pace in 12 months, driven by a 2.8% rise in the CFPI. During July, the indices of five of six groups increased on a month-on-month basis, but the annual inflation prints of four have declined, owing to the base effect.
The base will continue to have a pronounced bearing on August inflation also (which is seen to be around 3.5%), but thereafter it might ebb.
The miscellaneous index rose 0.8% on month, indicating rising underlying price pressures. Core inflation came in at a five-month high of 3.4% in July.
“Core inflation edged up to 3.4% due to higher gold prices and telecom tariff revisions. The bottom for core inflation is probably behind us and we see a move above 4% over the coming months,” said Sakshi Gupta, principal economist, HDFC Bank.
“For headline inflation, the monsoon progress in the coming weeks will be crucial to determine whether food inflation shocks subside,” said Gupta. So far, monsoon has been 6.4% above the benchmark long period average (LPA).
Under food, the major pain points remain cereals and pulses. The inflation of both the groups have remained above 6% for more than a year. In July, the inflation of ‘cereals and products’ and ‘pulses and products’ stood at 8.14% and 14.77%, respectively.
“While inflation numbers in the coming months may come down due to this (base) effect, the new crop will enter only post September which will determine the future course of price movements,” said Madan Sabnavis, chief economist, Bank of Baroda.
In Q2FY24, the Reserve Bank of India (RBI) has projected CPI inflation to average 4.4%, which is 60 basis points (bps) higher than its previous estimate. But with the current print, economists say retail inflation may in fact average closer to its previous forecast of 3.8%.
“Inflation in H2 may also track somewhat below the central bank’s forecast of 4.5%,” said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership (I-SEC PD). “Yet, we don’t see rate cuts this CY (calendar year) as growth remains strong, with RBI poised to lag other DM (developing markets) central banks in this cutting cycle,” he said. The repo rate currently stands at 6.5%
The RBI has projected CPI inflation to average 4.5% in FY25, which is still higher than its target of 4%. “The MPC stays resolute in its commitment to aligning inflation to the 4% target on a durable basis,” the monetary policy statement for August had said.
“We continue to maintain that RBI will be in a status quo mode on rates for the October policy with a likely shift in stance then,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.