Only good monsoon can ensure CPI inflation stays in comfort zone

On the face of it, CPI inflation is already in the comfort zone but sustaining that level into the future will depend on a normal monsoon. The CPI inflation print for May at 4.25 per cent eased to a softer than expected 20-month low of 4.3 per cent. In fact, May CPI inflation was lower than expectations and benefited from a favourable base effect as well as further fall in food inflation. Food inflation gained from a sequential fall in prices of fruits and oils even as prices of eggs, meat, milk, vegetables and pulses continued to increase partly reflecting the seasonal impact. The core inflation was broadly unchanged at 5.15 per cent though it is likely to inch up marginally over the next few prints. Overall, a Kotak report says, the RBI will see this print favourably as it is well within its estimates. However, it will remain on an extended pause as it watches for the monsoon outturn and the impact on prices. Nevertheless, concerns loom on the horizon regarding the potential impact of a sub-par monsoon, as per Icra, on food inflation in the second half of this fiscal. The reason behind it is that onset of the monsoon has been delayed, and pan-India rainfall has been deficient so far.

While seasonally healthy reservoir levels are likely to provide some respite, a normal distribution of rainfall in July will be critical to ensure timely sowing of kharif crops across the country. As a result, hopes hinge on El Nino conditions as these could lead to a sub-par monsoon and impact kharif yields and rabi sowing, and thereby affect crop output and food inflation. The headline CPI inflation, analysts hope, may rise mildly to 4.5-4.7 per cent in June, based on the early uptrend in the prices of most of the food items, barring edible oils. Whatever be the case, the average CPI print for Q1 is likely to come in at 4.5 per cent, marginally lower than the MPC’s revised projection of 4.6 per cent for that quarter.

As a result, Icra expects an extended pause through FY24, and the stance to remain unchanged over the next couple of policy meetings. However, wheat prices have sharply increased in the last couple of weeks as farmers have hoarded supplies and the government has imposed stock limits on the product for the first time in 15 years, while also announcing the release of 1.5 mn metric tonnes from its stock in the open market. Emkay also keeps a watch out for a potential El Nino in H2CY23, as a risk factor for food inflation. The retail inflation remained within the tolerance range of the RBI for the third consecutive month. Nevertheless, continued vigil on the evolving inflation outlook is warranted, as per Ecowrap, especially as the monsoon outlook and the impact of El Nino remain uncertain.