Informist, Monday, May 13, 2024

By Shubham Rana

NEW DELHI – India's headline CPI inflation has been well-behaved for a while now. It has declined for four consecutive months and has now fallen to a 11-month low of 4.83% in April, as was expected, even if the decline from the previous month was only 2 basis points.

Couple this with the Reserve Bank of India’s forecast of inflation falling below the 4% target later this year, after nearly five years, and the inflation outlook appears benign.

However, several uncertainties remain which make the inflation outlook much hazier than what the headline numbers make it out to be.

And policymakers are cognisant of these risks, with members of the Monetary Policy Committee cautious about supply side risks and their ability to undo the gains made in moderating headline inflation.

As such, economists continue to push away their expectations of when the MPC will lower interest rates, with some not expecting a rate cut in this entire financial year, which started in April.

The biggest risk to the inflation outlook is from food inflation, which rose to a five-month high of 8.70% in April. The food index also rose 0.7% on a month-on-month basis in April, with the upward pressure mainly stemming from vegetables, meat and fish.

The vegetable price index rose 1.3% sequentially in April even as vegetable inflation eased to 27.8% from 28.3% in March. The potato price index jumped 19.4% on month in April, while the tomato index was up 1.9% from the previous month. The meat and fish index rose 2.4% in April from the previous month.

"The seasonal rise in food prices is preventing a sustained disinflation in headline," Barclays said in a report, adding that the prices of perishable food items will likely rise heading into the summer.

With most parts of India facing the brunt of heatwaves this summer, economists fear that higher temperatures have the potential to push up food inflation. Typically, prices of perishable food items, especially those of vegetables, rise more in the summer months. On an average, the vegetable retail price index rises 2.7% on month in May and 7.0% in June, reflecting the seasonality of the supply.

Any impact of heatwaves on food prices is expected to be short-lived thanks to monsoon rains, which the India Meteorological Department forecasts will be above normal this year at 106% of the long period average. "The outlook for food inflation has brightened due to anticipations of a normal monsoon, which is expected to bolster agricultural production," CareEdge Ratings said in a report. "However, the temporal and spatial distribution of monsoon would be critical factors to monitor."

Another factor which can hinder a moderation in inflation is the ongoing geopolitical tension, which, if it flares up, can lead to supply chain disruptions and a rise in crude oil prices, economists said.

While food prices have kept upward pressure on the headline inflation since last year, a big point of comfort has been core inflation, which was at a record low of 3.2% in April. Core inflation, which excludes food and fuel items, has been declining for most of the last 12 months, mainly because of low global commodity prices and subdued demand.

But core inflation may not be able to support headline inflation for a sustained period of time as commodity prices rise globally and demand improves, economists said.

"Apart from elevated food inflation, incremental risk to inflation stems from the uptick in global commodity prices, especially industrial metals," CareEdge Ratings said in the report. "Industrial metal prices are up around 20% in the past three months. This warrants closer attention as the rise in input prices can be passed on to the consumption basket."

International commodity prices have come under some pressure in recent months on account of resilience in global demand and a surge in geopolitical risk premium, QuantEco Research said in a note. "While gold, silver, and ornaments have captured this spillover impact almost instantaneously, the pass-through to other items of inflation would happen with a lag depending upon the import intensity and pricing power, economists at QuantEco noted.

According to Bank of Baroda Chief Economist Madan Sabnavis, core inflation "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."

RBI Governor Shaktikanta Das has flagged the central bank’s commitment to align inflation to the 4% target. "Two years ago, around this time, when CPI inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation," Das had said on Apr 5.

"The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis," Das had said while detailing the outcome of the Monetary Policy Committee meeting last month.

As uncertainties to the inflation outlook continue to persist, the timeline for an interest rate cut gets pushed further away, economists said.

"With continued uncertainty, especially on the risks to the food inflation trajectory after Jul-Sep, the chance of a stance change in the upcoming June 2024 monetary policy review appears rather dim. At best, we foresee 50 bps of rate cuts from the MPC, in Oct-Dec," ratings agency ICRA said in a report.

As is the current inflation scenario, economists are certain the MPC will not tinker with either the interest rate or the ‘withdrawal of accommodation’ policy stance when it meets next month. End

Edited by Maheswaran Parameswaran

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2024. All rights reserved.