At 3.54%, CPI Eases Below RBI's 4% Target For First Time In 5 Years; Is Inflation Out Of The Wood?

India's CPI inflation cooled off sharply to 3.54% in July 2024, due to a sharp decline in food prices. That being said, CPI has reached below RBI's medium-term 4% target for the first time in nearly five years and is also surpassing pre-Covid levels. Does that mean, inflation is out of the woods, and that a sooner-than-expected rate cut by RBI is likely ahead?

As per ministry data, CPI inflation in July 2024 came in at 3.54% (provision), compared to a 5.08% inflation rate in June 2024, and against at 7.44% in July of the previous year. In July 2024, the rural and urban inflation rate stood at 4.10% and 2.98% respectively.

Also, the latest inflation print cooled off sharply due to food inflation which is the lowest since June 2023. In the month under review, the consumer price food index (CFPI) stood at 5.42% versus 9.36% in May 2024 and 11.51% in July 2023.

According to Trading Economics, the annual consumer inflation rate in India fell sharply to 3.54% in July of 2024 from 5.08% in the earlier month, well below market expectations of 3.65%, to mark the softest rise in consumer prices since August 2019. It was the first time the inflation rate fell below the RBI's target range of 4% in nearly five years, although the sharp decline was largely owed to large base effects in food prices and the central bank does not expect price growth to remain this low for the rest of the year.

Also, Rajani Sinha, Chief Economist, CareEdge Ratings highlighted that core inflation remained largely benign, rising to 3.4% in July, up from 3.1% in June, likely reflecting recent hikes in telecom tariffs and the upward revision of fuel prices in certain states.

Additionally, Sinha said that despite the moderation in the inflation of the food and beverage basket when compared to last year, the sequential momentum remains strong, with a 2.5% MoM increase in prices, higher than an average sequential growth of 1.3% MoM in Q1 FY25. Much of the sequential increase in food prices is due to a sharp rise in vegetable prices which rose 14.1% MoM. The early arrival of Kharif harvests in the second half of September is expected to cool this sequential momentum in food prices.

However, as per CareEdge's economist, it will be crucial to monitor the temporal and spatial distribution of the monsoon and the progress of Kharif sowing.

Sinha said, "Although all-India rainfall is currently about 6.3% above normal, key agrarian regions such as Punjab, Haryana, and the eastern Gangetic Plains are experiencing double-digit rainfall deficits. This is concerning, as reservoir levels especially in northern India remain below both normal and last year's levels."

Adding, Sinha said, "The sowing of foodgrains in the Kharif season remains robust, with a 6% increase compared to last year. However, this growth is inflated by the low base of last year when El Nino-induced disruptions negatively impacted sowing. A concerning aspect is the lagged sowing of pulses this time, which is down by 6.2% compared to 2022. This is particularly worrisome, as inflation in pulses has remained in double digits for the past 14 months. Controlling price pressures in the food basket is essential, as they can significantly influence households' inflationary expectations."

Meanwhile, Aditi Nayar, Chief Economist, Head of Research and Outreach, ICRA said, "With all of the 22 essential commodities reporting an easing in their YoY inflation rates in August 2024 (till Aug 10, 2024; as per the Department of Consumer Affairs data) relative to July 2024, the food and beverages inflation print should ease further in the ongoing month, thereby dampening the headline CPI inflation to 3.4% in August 2024. Nevertheless, the trajectory of perishable prices remains a key monitorable in the near-term."

Additionally, Murthy Nagarajan, Head-Fixed Income, Tata Asset Management said, "Here were fears of CPI inflation coming higher as RBI has revised 2nd quarter CPI inflation forecast from 3.8% to 4.4% per cent in its latest monetary policy. This will be taken as positive by the markets but we also have the US CPI data coming in the next 2 days. This data may continue the positive momentum in the debt market."

Globally, Sinha said, commodity prices, which had been rising through the first half of CY 2024, have eased over the past couple of months. However, external risks emerging from ongoing geopolitical tensions need to be monitored, given the risk they can pose to supply chains and commodity prices.

Looking ahead, Sinha added that "the base effect will turn unfavourable in both August and September which can lead to a reversal of the trend witnessed this month. For FY25, we expect inflation to average 4.8%. If food inflation moderates, we anticipate that the RBI may initiate a shallow rate cut cycle in the second half of the fiscal year."

Assuming a normal monsoon, in the August monetary policy, RBI projected CPI inflation for 2024-25 at 4.5 per cent with Q2 at 4.4 per cent; Q3 at 4.7 per cent; and Q4 at 4.3 per cent. CPI inflation for Q1:2025-26 is projected at 4.4 per cent. The risks are evenly balanced.