The headline CPI easing is no doubt good news but UBS says the current mix of strong real GDP growth and falling core inflation seems puzzling. According to them this could partly be explained as the impact of the lower global commodity prices helping in lessening the input cost pressure. That said, they believe that there is no urgency for the Reserve Bank’s MPC to change policy settings yet.
Tanvee Gupta Jain, Economist at UBS India pointed out that, “We think there is no urgency for the MPC to change policy settings (rates and stance) in the April policy. We expect the shift in policy stance to “neutral” to likely happen in the June policy. We maintain our call for a shallow rate cut cycle in FY25 (cumulative 50bp), following the Fed pivot in June (UBS forecast) and as India’s real policy rate also starts inching into restrictive territory (amid faster-than expected disinflation).” This is based on the assumption that India’s growth momentum will continue to remain robust.
CPI inflation set to soften further
She explained that the headline CPI inflation is expected to “decelerate below 5%YoY in March and soften further below 4% in September quarter on gradual easing in food prices (assuming normal monsoons) and comfortable core inflation.” Given the fact that the liquidity conditions have improved over the last two weeks, “the frictional liquidity conditions may tighten over the coming weeks on advance tax outflows and increase in currency in circulation ahead of general elections,” she added As a result, they expect RBI to “continue fine-tuning system- liquidity to ensure overnight rates ease closer to the repo rate.”
One of the direct implications of the CPI would be lower weightage of food and beverages segment in the household expenditure. As per the latest household consumption expenditure survey (HCES) 2022-23 provided by UBS, the weight of food items in monthly per capita consumption expenditure (MPCE) have gradually fallen to 46.4% for rural India (from 52.9% in 2011-12 survey) and to 39.2% for urban India (from 42.6% in previous survey). Currently, the share of food & beverage in India’s CPI basket at 46%. This according to UBS is one of the highest across Asian economies. “While food will still continue to have a dominant share in overall CPI index, we expect the weight of food & beverage segment to come down to 42% once these updated HCES results for 2022-23 are incorporated,” explained Gupta.