Brokerages expect India's retail inflation to ease from Sept, but rate cut cycle may lag

Food inflation, which makes up nearly half of the CPI basket, climbed to 5.66 percent in August

India's retail inflation inched up to 3.65 percent year-on-year in August, up from 3.54 percent in July, driven by rising food prices. Despite the uptick, it stayed comfortably within the RBI's 4 percent tolerance band. While brokerages predict some of this inflation bump to ease in the coming months, they anticipate a slower start to the rate cut cycle compared to the US Federal Reserve.

UBS analysts predict that vegetable prices will start to cool down from September onwards but believe the RBI will trail the Fed in both the timing and scale of rate cuts. Similarly, Goldman Sachs expects the recent uptick in headline inflation to taper off and has maintained its forecast at 4.5 percent year-on-year for CY24.

Meanwhile, Morgan Stanley expect inflation to average around 4.5 percent in the second half of current financial year. On the monetary policy front, they expect RBI to maintain rates at 6.5 percent amid robust growth trend warranting higher neutral real rates as inflation remains above the 4 percent mark.

ALSO READ: Lower inflation, manufacturing pick-up split opinions on rate cuts

Food inflation, which makes up nearly half of the CPI basket, climbed to 5.66 percent in August, up from a 13-month low of 5.42 percent in July. The inflation rate for vegetables surged to 10.71 percent, compared to 6.83 percent the previous month, largely due to erratic monsoon patterns.

Inflation in pulses and cereals remained elevated at 13 percent and 7.31 percent, respectively, while fruit inflation reached 6.45 percent. Milk and dairy products saw a milder rise, with inflation at 2.98 percent in August.

In urban areas, food inflation dropped to 4.99 percent in August 2024, down significantly from 10.42 percent a year earlier. Rural food inflation also cooled, falling to 6.02 percent from 9.67 percent during the same period.

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