CPI inflation seen rising to 4.6% in June on higher vegetable prices, fading base effect

At 4.6 percent, the expected CPI inflation print would be within the Reserve Bank of India's (RBI) mandated tolerance band of 2-6 percent for the fourth month in a row. However, it will stretch its run above the RBI's medium-term target of 4 percent to a 45th straight month.

While inflation may not have risen sharply in June, prices of certain items within the CPI basket surged last month.

"Rising prices of vegetables (especially tomatoes) and pulses have pushed inflation higher. Excluding vegetables and pulses, CPI may have stayed flat in June at 5 percent," noted economists from Standard Chartered Bank, who expect food and beverage inflation to have risen to 4.6 percent in June from 3.3 percent the previous month.

Data from the Department of Consumer Affairs shows tomato prices were 38 percent higher in June, compared to May, while those of potatoes and onions were 5.7 percent and 4.2 percent higher, respectively.

"Tomato prices have risen sharply in the past month, as supply was hit by a late start to this year's monsoon," said Rahul Bajoria, head of EM Asia (ex-China) Economics, at Barclays.

"That said, this phenomenon is not new, as tomato prices typically rise in the late summer when supply becomes limited, and tend to fall as monsoon rains spread further and mandi arrivals improve. After a delayed onset, this year's monsoon rains have now progressed to cover the entire country earlier than normal and the rainfall deficit is quickly reducing," he added.

Prices of cereals also increased sequentially by 1.3-1.5 percent in June. Among pulses, tur dal has been a matter of concern, with prices up 6.4 percent month-on-month, forcing the government to take action to ease pressures.

The other volatile component of the CPI, fuel, likely saw a decrease in prices on a month-on-month basis, with Bajoria pointing at lower retail prices for subsidised kerosene and commercial LPG.

Policy impact

A CPI inflation print of 4.6 percent in June will take the average for the first quarter of 2023-24 to 4.5 percent – 10 basis points lower than the RBI's forecast.

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

While the RBI expects headline inflation to rise going forward, economists see the Monetary Policy Committee (MPC) cutting the repo rate in the coming months – although the movement of core inflation may have a say in that.

"Monetary policy is likely to focus more on underlying inflation than an outlier, but a vegetable price-driven surge in the headline CPI could increase the policy trade-offs and risks delaying the first cut," noted Nomura economists Sonal Varma and Aurodeep Nandi.

Varma and Nandi see the MPC cutting the repo rate in October.

Core inflation, or inflation excluding food and fuel, has fallen sharply in the last 2-3 months to around 5 percent from more than 6 percent. Economists see it broadly unchanged in June at just over 5 percent.

The MPC, which has left the repo rate unchanged at 6.5 percent in its last two meetings, is scheduled to meet next from August 8 to 10.

IIP growth

The statistics ministry will today also release the industrial growth data for May at 5:30 pm, which is expected to show output grew by 5 percent, according to estimates of 15 economists polled by Moneycontrol.

High-frequency data suggests India's industrial growth picked up some pace in May. While data released on June 30 showed core sector growth was 4.3 percent – the same as in April – economists saw some pick-up in month-on-month growth on a seasonally adjusted basis.

"We expect seasonally adjusted IP (industrial production) growth to exhibit a similar or slightly higher month-on-month trend," said Kaushik Das, Deutsche Bank's chief economist for India and South Asia.

The eight core industries - namely coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, and electricity - make up around 40 percent of the IIP. As such, they are seen as a lead indicator of industrial growth data.

Meanwhile, other indicators too showed some improvement in industrial performance, with the Purchasing Managers' Index for the manufacturing sector rising to a 31-month high of 58.7 from 57.2 in April. At the same time, merchandise exports contracted by 10.3 percent in May as opposed to a 12.6 percent contraction in April.

"Other high-frequency indicators like vehicle production showed healthy growth rates for cars, all types of two-wheelers and three-wheelers in May. Fuel demand also increased 8 percent month-on-month," noted Rupa Rege Nitsure, group chief economist with L&T Finance Holdings.