CPI inflation seen dropping to 18-month low of 4.8% in April

India’s headline retail inflation rate fell sharply in March and is expected to crash below 5% in April.

India's headline retail inflation is expected to have dropped to an 18-month low in April, thanks to a favourable base. According to a Moneycontrol survey of 19 economists, Consumer Price Index (CPI) inflation likely fell sharply to 4.8 percent last month from 5.66 percent in March.

The Ministry of Statistics and Programme Implementation will release retail inflation data for April at 5:30 pm on May 12. The ministry will also release the Index of Industrial Production (IIP) data for March the same day.

CPI inflation, at the Moneycontol survey level of 4.8 percent, would be falling below 5 percent for the first time since November 2021, when it had printed at 4.91 percent.

Inflation is also expected to stay within the Reserve Bank of India's (RBI) mandated tolerance band of 2-6 percent for the second straight month in April, after spending much of the last 15 months outside it. However, it will likely stretch its run above the RBI's medium-term target of 4 percent to a 42nd straight month.

Inflation in April

For the second month in a row, a favourable base effect will likely be the strongest driver of disinflation. In April 2022, the CPI had jumped 1.4 percent month-on-month, creating a high base for the inflation print in April this calendar year.

"Food CPI likely slipped to 4.2 percent despite a month-on-month price rise in vegetable, fruit, pulses, milk, and sugar, while a drop in cereal prices helped," noted Kanika Pasricha, economist at Standard Chartered Bank.

Food inflation stood at 4.79 percent in March.

"The fuel sub-index is likely to remain flat on a sequential basis, as a sharp fall in kerosene prices and a modest decline in LPG prices will likely offset the relatively moderate rise in electricity prices," said Rahul Bajoria, head of EM Asia (ex-China), Economics, at Barclays.

Bajoria expects overall fuel inflation to fall to a 25-month low of 5.7 percent in April from 8.91 percent in March.

Meanwhile, core inflation is expected to have fallen further in April after easing by 30 basis points to 5.8 percent in March.

One basis point is one-hundredth of a percentage point.

Policy impact

A sub-5 percent inflation print in April will provide a strong start in meeting the RBI's inflation forecast of 5.1 percent for April-June.

While the base effect remains favourable until October, it peaks in April.

The RBI expects CPI inflation to average 5.4 percent in July-September and October-December before easing slightly to 5.2 percent in the first quarter of 2024.

According to Kaushik Das, Deutsche Bank's chief economist for India, there is "no strong justification" for the RBI to further hike interest rates.

"While a potential poor monsoon could pose a threat to the inflation trajectory in future, we think rates are sufficiently high to anchor inflationary expectations, and, therefore, any temporary spike in CPI will likely be seen through," Das said.

In its last decision on April 6, the MPC left the repo rate unchanged at 6.5 percent, but said it would not hesitate to take further action in future meetings, if required. Governor Shaktikanta Das clarified further, saying the status quo was "a pause, not a pivot".

However, economists are not convinced and think the MPC is done with its hiking cycle. Das of Deutsche Bank sees the MPC on an "extended pause" before cutting the repo rate by 100 basis points in 2024.

The MPC is scheduled to meet next from June 6 to 8.

IIP growth

The statistics ministry will also release the Index of Industrial Production (IIP) data for March on May 12. This is expected to show that industrial output grew by 3.2 percent, according to estimates of 16 economists polled by Moneycontrol.

The mixed performance of lead indicators suggest industrial growth slowed down in March.

Data released on April 28 showed the output of India's eight core sectors increased by 3.6 percent in March, the weakest pace in five months. Core industries account for around 40 percent of the IIP. As such, the former's performance is seen as a lead indicator of the latter. Further, merchandise exports contracted by 7.5 percent in the last month of 2022-23.

While IIP growth is seen declining in March, on a sequential basis, industrial output is expected to grow "at a healthy pace, gaining support from year-end seasonal demand", noted Avni Jain, an economist at HDFC Bank.

"We see easing global growth and normalising demand keeping IIP growth in low single digits for the coming months," Standard Chartered Bank's Kanika Pasricha added.