A lower inflation along with a slowdown in industrial production may make the case stronger for a rate cut in the next meeting, but economists point that there is more to the numbers that meets the eye.
While inflation slowed to a 59-month low of 5.9 percent in July with food inflation halving to 5 percent from 9.4 percent in the previous month, a large part of it was due to the base effect.
Inflation in July 2023 was a high 7.4 percent. Also, a look at sequential numbers or month over month changes shows galloping prices.
Consumer price index, the basis to determine consumer inflation, was up 1.4 percent in July with food prices rising 2.8 percent for the month. Vegetable prices were up 14.1 percent monthly, while pulses rose 1.3 percent over the month.
“Despite the moderation in the inflation of the food and beverage basket when compared to last year, the sequential momentum remains strong, with a 2.5 percent month-over-month (m-o-m) increase in prices, higher than an average sequential growth of 1.3% (m-o-m) in Q1 FY25,” said Rajani Sinha, chief economist, CareEdge.
Transport and communication, a major expense in urban and now increasingly in rural areas, was up 1.8 percent, owing to tariff hike by telecom players.
Fuel and light was the only category recording lower prices in July compared to previous month.
On the other hand, the news on the production front may seem gloomy as the headline number was two percentage points lower than the previous month. However, economists point to an improving scenario in the coming quarters.
“Industry does appear to be on the right path and further pick-up can be expected from the end of Q2 and Q3, as the festival season brings in higher demand,” said Madan Sabnavis, chief economist, Bank of Baroda.
Rate cut on the anvil?
Growth and food inflation would be key to deciding the strategy on rates, according to economists.
“Overall, we don't see any impact on the monetary policy from today's data. We continue to expect a rate cut in 2025, unless growth falters,” said Nikhil Gupta, chief economist, Motilal Oswal FSL Group.
Reserve Bank of India Governor Shaktikanta Das on August 8 expressed concerns over elevated household inflation expectations, highlighting that fall in core inflation does not merit a change in monetary stance.
The Reserve Bank of India in its policy meeting concluded on August 8, kept the policy rate on hold for the ninth consecutive time.
India Ratings and Research does not expect any rate action in FY25.
“If food inflation moderates, we anticipate that the RBI may initiate a shallow rate cut cycle in the second half of the fiscal year,” Sinha from CareEdge said.
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