Inflation target may be delayed despite easing of core inflation, as food inflation risk stays

The central bank has an inflation target of 4 percent, with a leeway of 2 percentage points on either side

The Reserve Bank of India's (RBI) target of keeping the Consumer Price Index (CPI) inflation at around 4 percent is expected to get delayed despite easing of core inflation to a historic low, as food inflation risks remain, economists said.

The central bank has an inflation target of 4 percent, with a leeway of 2 percentage points on either side.

In May, India's headline retail inflation eased to the lowest in a year to 4.75 percent in May 2024. Whereas, core inflation, which excludes volatile components such as food and fuel, is now at an all-time low of below 3 percent.

"Easing core inflation alone may not help. We have seen how sticky food inflation has been in May, especially vegetables and pulses. Bad rains will play spoilsport with this maths," said Madhavankutty G., Group Chief Economist - Manappuram Finance.

Kanika Pasricha, Chief Economic Advisor, Union Bank of India echoed what the RBI also stated in a recent paper, "food prices are the true core of inflation" in the Indian economy, hence they are key to RBI's inflation targeting process.

Most economists Moneycontrol spoke to, denied the likelihood of an early change in stance by the central bank considering the volatility in food inflation and subcategories.

Currently, the central bank holds a 'Withdrawal of Accomodation' stance, and has held the repo rate at 6.50 percent. In the June monetary policy, the RBI kept the repo rate unchanged.

The RBI's bulletin released on May 21 said durable alignment of inflation with the target of 4 percent may happen in the second half of the year.

“It is only in the second half of the year that a durable alignment with the target may re-commence and sustain till numbers closer to the target are sighted during the course of 2025-26,” the RBI's monthly State of the Economy article said.

In the June monetary policy, the RBI maintained its FY25 inflation projection of 4.5 percent but added that food prices could continue to be sticky.

The central bank projected CPI inflation for Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent.

Also read: RBI may keep rates tight till further clarity on food inflation risk, say economists

Worries over food inflation
RBI Governor Shaktikanta Das said in the June monetary policy that the central bank remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation.

In May, food and beverages inflation remained the same at 7.87 percent last month compared to a month ago period.

Among food, while prices of vegetables eased marginally to 27.33 percent in May versus 27.80 percent a month ago, pulses saw a slight rise to 17.14 percent from 16.84 percent. Cost of cereals were also up on a month-on-month basis.

Meat and fish prices saw a significant decline to 7.28 percent last month from 8.17 percent in April.

Paricha from Union Bank of India said vegetables are the most volatile sub segment and with current inflation of more than 25 percent (as seasonal correction during the second half of FY24 did not get completed due to uncertainties in  weather ) have been a cause for concern.

She said the sub segment causing greater stress is cereals with a combined 10 percent weightage in CPI and  seeing a combined 8 percent inflation,  contributing 80bps to headline CPI. The persistence of price pressures amid food stocks at multi year lows (especially wheat stocks at more than 15-year lows) is on watch.

Also read: Quickview| RBI’s Das is focussed on fighting inflation and that's good news for us

Possible rate cut

Economists are of the view that the central bank may start cutting rates from October as there will be greater clarity on food inflation after completion of monsoon.

"The earliest the RBI can cut interest rates is in October when there will be greater clarity on food inflation risks as the monsoon season is completed," said Gaura Sen Gupta, Chief Economist at IDFC First Bank.

However, Madhavankutty G. from Manappuram Finance said there is no chance of rate cut in FY25. "Even the fiscal maths has to be seen now given the changed political equations and a possible truant monsoon."

Further, Pasricha said stance change may come along with a rate cut, similar to the last rate cut cycle starting February 2019.