Banking Central | CPI inflation at 5.7% in March guarantees a pause in June but watch out for crude

Reserve Bank of India

Last week's major event in banking was the inflation data release. As expected, the consumer price index (CPI)-based inflation eased below 6 percent in March. Why the fall?

The fall in inflation to 5.7 percent can be attributed to two factors. One, a favourable base effect. Second, easing food prices. On a year-on-year basis, food prices eased (4.8 percent versus 6 percent), although they inched up sequentially (0.3 percent). Going ahead, some economists expect cereal prices, which have been driving the recent increase in food inflation, to fall substantially aided by government interventions.

In April, too, the inflation should show a lower number — around 4.8 percent-4.9 percent — which will be a significant reason for the Monetary Policy Committee (MPC) to go for a pause in June. Beyond that, two factors will play out—monsoon distribution and how the global crude prices behave.

If inflation doesn’t surprise on the upside and stays below 6 percent, the MPC could stay on pause mode for the rest of the year, with even the possibility of a rate cut by end of the year.

Oil prices

Oil prices, however, are a clear risk. The International Energy Agency (IEA) has warned that crude may surge due to recent supply cuts by oil producers. There is a fear that crude may be on its way to $100 a barrel. If that happens, MPC’s inflation projections can face threats.

Banking Central

Second is the monsoon. While private forecaster Skymet has a "below normal" prediction, India Meteorological Department has predicted a normal monsoon. A poor monsoon distribution could have adverse ramifications on prices.

The Reserve Bank of India (RBI)  seems to have informally shifted to a growth-supportive stance already. The language and tone of the policy suggest that it won’t be going on an all-out attack on inflation anymore. The MPC has kept the bar high for future rate hikes by choosing to pause in March despite two consecutive months over the six percent upper band. Hence, the chances of a rate hike arise only if inflation spikes beyond those levels.

Given the available data points, a pause in the June policy is almost a given, considering the lower inflation print expected in April. Beyond that, oil prices and the monsoon rain hold the key.