India’s inflation dynamic has turned favourable due to lower commodity costs, statistical base effects and government interventions, Acuite Ratings has said, adding it expects the Reserve Bank of India (RBI) to maintain a prolonged pause on rates and gradually scale back liquidity to push monetary policy transmission.
Consumer Price Index (CPI) inflation moderated to a 15-month low in March at 5.66 percent, while at 1.34 percent, the Wholesale Price Index was at its lowest in 29 months.
Cooling commodity, food prices
The headline CPI inflation reverted to RBI’s target range (2-6 percent) after two months. This came on the back of a drop in commodity prices, favourable statistical base effect and government interventions to ease prices of food articles, Acuite Ratings and Research said in a recent report.
Listing some of the steps taken by the Centre, the report said the open market sale of wheat from the buffer stocks helped cool down prices.
“The ban on wheat exports has persisted since May 2022, given the continuing risks of a lower wheat harvest in the concluding rabi season,” it said.
Moreover, core retail and wholesale inflation are exhibiting early signs of moderation on account of incremental softness in most commodity prices along with a slowdown in global demand.
Risk factors
Notwithstanding the cooling of price pressures, Acuite Ratings said the possibility of El Nino conditions likely evolving during the later summer months could push up food prices.
The recent rally in crude oil prices following the surprise announcement of yet another production cut by the Organisation of Petroleum Exporting Countries (OPEC) and allies could serve as an upside risk to inflation.
“Potential risks notwithstanding, we see a steady moderation in headline CPI inflation in FY24 as compared to core inflation. We maintain our FY24 CPI inflation projection of 5.3 percent,” the report said.
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From the monetary policy perspective, it expects the central bank to maintain a prolonged pause and gradually scale back liquidity surplus to push monetary policy transmission.
However, the impact of global uncertainties on growth-inflation dynamics keeps the door open for incremental rate hikes in the near future, it added.
The central bank, which effected six back-to-back hikes in the key short-term lending rate (repo) since May 2022 to curb red-hot inflation, decided to take a pause in early April. All six members of the MPC voted for pausing the rate at 6.5 percent in the meeting held during April 3-6.
Suman Chowdhury, Chief Analytical Officer, Acuite Ratings, said while the average inflation for Q4FY23 still stands at 6.21 percent, the drop of around 80 basis points (bps) in the March print partly validates the "pause" taken by the MPC.
One basis point is one-hundredth of a percentage point.
“If there are no surprises on the weather and the oil front, one can expect the headline inflation to moderate further and settle in the band of 5-5.5 percent over the next few months. Such a trend is likely to support the continuation of the pause although a pivot on rates is still some distance away,” he added.
