With Sub-Par Growth, Weaker Demand Dynamics Will Keep Pressuring Core Inflation

The CPI inflation unexpectedly inched up to 3.7 per cent in August from 3.6 per cent in July, led by food and beverages segment and it is likely to inch up further in September. With base effect normalising, Icra expects a sharp pickup in CPI inflation to 4.8 per cent in September, and range between 4.4 per cent and 4.7 per cent in H2. Kharif crops were sown on 109.2 million hectares by September 6 or nearly 99 per cent of the total area covered in 2023 season, and exceeding the year-ago levels by 2.2 per cent. Thus, the average CPI inflation will undershoot MPC’s Q2 estimate of 4.6 per cent. Slightly higher headline inflation for August is largely due to a less-than-expected decline in food prices, while in contrast sequential momentum was flat. Upside risks to food inflation are emanating due to possible unseasonal rains in October and November damaging the kharif harvest. While the MPC has been wary of higher food spill-over risks to core inflation, Emkay sees core inflation averaging at 3.6 per cent in FY25 and staying below four per cent till end-CY24.

The Reserve Bank of India (RBI) is likely to remain 'actively disinflationary' and be on wait-and-watch mode to assess multiple macro forces, unless, of course, changing global winds compel it to focus on financial stability over the four per cent inflation mandate. Within food, most categories saw price declines in August with vegetable prices falling 2.5 per cent as regular supplies resumed following rainfall-led disruptions. The soft run of core inflation continued as it rose 3.3 per cent YoY, the same as July’s reading. With favourable base effects beginning to reverse September onwards, this is likely the low point for core inflation, and it should begin moving toward and above four per cent by end-CY24. Analysts are currently tracking September headline inflation at 4.5 per cent, as per RBI’s projection. Food prices for September so far have corrected sharply, especially of pulses, vegetables, and edible oils, even as pulses and fruits are presently tracking higher.

While MPC has been wary of higher food spill-over risks to core inflation, experts see core inflation averaging at 3.6 per cent in FY25 and staying below four per cent till end-CY24. The Fed's pivot will precede and impact the RBI's change in stance and rate action, even though the central bank maintains that Fed actions are not a key determinant in their rate actions. As long as global market volatility remains contained, there will be flexibility for the RBI to stay focused on domestic inflation and risk management. Analysts maintain that growth is sub-par in India and weaker demand dynamics will keep pressuring core inflation. However, the RBI is likely to continue to stress on being 'actively disinflationary' and maintains a wait-and-watch stance to assess multiple macro forces, unless, of course, swinging global winds compel it to focus on financial stability over the four per cent inflation mandate.