The consumer-price index (CPI) based inflation has remained within the Reserve Bank of India’s (RBI) tolerance band of 2-6 per cent for the third consecutive month.
The consumer food price index (CFPI) eased to 2.91 per cent in May from 3.84 per cent in April. Rural inflation stood at 4.17 per cent while urban inflation stood at 4.27 per cent.
Sequentially, the inflation remained unchanged at 0.51 per cent in May.
Inflation rate for vegetables witnessed a contraction of 8.1 per cent in May. The inflation levels for food & beverage and fuel segments stood at 3.29 per cent and 4.64 per cent, respectively. For cereals, the inflation rate came in at 12.65 per cent as against 13. 67 per cent.
The number can be attributed to moderation in food and fuel prices apart from the base effect. The easing price of cereals and vegetables in addition with lower energy prices have also pulled back the inflationary levels.A sharp fall in international prices of LPG and kerosene can also be linked with the lower fuel inflation in May.”Inflation softened further in May as a high base effect continued to pull down the inflation prints. Food inflation continued to moderate and it was encouraging to see a seasonally adjusted sequential decline in the headline inflation as well in the month. Going forward, inflation is expected to print below 5% again in June although moving higher from Q2 onwards,” Sakshi Gupta, Principal Economist at HDFC Bank, said.
“The impact of any El Nino disturbances, the higher MSP price increases and the late arrival of monsoons remain upside risks for the inflation trajectory going forward. The RBI is expected to remain on hold in 2023 with rate cuts starting not before 2024. Timing of rate cuts is likely to be determined by how impending weather related inflationary risks pan out. For the year, for now we retain our forecast of 4.9% average inflation in FY24, with upside risks to this estimate,” she added.
India’s retail inflation was above RBI’s 6 per cent target for three consecutive quarters and had managed to fall back to the RBI’s comfort zone only in November 2022.
A Reuters poll of 45 economists had predicted inflation to come down to 4.42 per cent in May, down from 4.70 per cent in April. It also stated that the number is set to be the lowest since October 2021.
Despite heat waves across the agriculture-dependent country, rises in food prices are expected to be kept in check by lower input costs and the government’s regular intervention to curb price spikes, reported Reuters.
Barclays’ Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, had also expected the inflation to moderate. “We expect the moderating trend in CPI inflation to continue in May and forecast headline inflation at 4.34 per cent, down from 4.7 per cent in April. If realised, it would be almost a two-year low for CPI inflation,” he said.
However, Bajoria also warned that prices may rise again starting July 2023 if the El Nino effects play out, which will impact production. Also, stickiness in core inflation may lead to prices inching higher.
“We expect stickiness in inflation in housing, clothing and footwear, and health and education,” Bajoria said, adding that demand resilience has given better pricing power to producers, which may not lead to the input costs being fully passed on to the consumer.
Bank of Baroda’s Sonal Badhan said, “In May, we are expecting a noticeable decline in the food index, especially vegetables, oils, and cereals. Fuel and core will also be down.”
In its recent Monetary Policy Meet (MPC) which concluded on June 8, the Reserve Bank of India (RBI) revised down the inflation forecast for FY24. The decision came amid recent dips in inflation readings, but the print is seen to remain above the 4 per cent target for this fiscal year while there are upside risks to food and commodity prices from potential supply cuts.
The RBI had cut the inflation aim to 5.1 per cent from 5.2 per cent forecast in April policy.
“The pace of monetary tightening has slowed in recent months, but uncertainty remains on its future trajectory as inflation continues to rule above targets across the world,” RBI Governor and MPC Chair Shaktikanta Das said while announcing the policy decisions. “(For India) Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” he had said.