Softer core inflation may help RBI inch closer to target, say economists

inflation

Continuous easing in core inflation is likely to provide confidence to the Reserve Bank of India’s Monetary Policy Committee as it augurs well for the expected moderation in the retail inflation trajectory, economists said.

Core inflation – or inflation excluding food and fuel – eased to 3.6 percent in January from 3.9 percent in the last month of 2023. In November, core inflation stood at 4.1 percent.

At an all-India level, while inflation as measured by the Consumer Price Index declined by 270 basis points (bps) to 5.10 percent in January from the level in April 2022, the weighted contribution of core CPI declined by 170 bps, SBI Research Ecowrap said in a report.

Three segments (transportation & communication, clothing & footwear, and household goods) contributed 77 percent of total decline in core inflation. In rural areas, the segments contributed 78 percent of the decline in core CPI, while in urban centres, they contributed 85 percent of the decline in core CPI.

“Core inflation continues to show broad-based moderation, spread over goods and services. This augurs well for inflation outlook as over time, headline inflation tends to move towards core,” said Gaura Sen Gupta, economist at IDFC First Bank.

Further, Vivek Kumar, Economist with QuantEco Research said we expect the disinflationary momentum in case of Core CPI to persist in the near term, with a likely bottom in Q1FY25, in the range of 3.0-3.5 percent.

"Some elements of Core CPI inflation could start mean reverting amidst adverse statistical base thereafter," Kumar added.

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Akhil Mittal, senior fund manager-fixed income at Tata Mutual Fund, said softening of core inflation should provide confidence to the trajectory of inflation moving as expected.

India’s headline retail inflation decelerated to a three-month low in January due to easing food prices, according to data released by the Ministry of Statistics and Programme Implementation on February 12. CPI inflation was 5.69 percent in December 2023.

At 5.10 percent, the CPI inflation figure is as per expectations. Economists had predicted prices likely rose 5.09 percent year-on-year in the first month of 2024.

Last month, RBI governor Shaktikanta Das said easing core inflation indicated that the monetary policy has worked.

“Core inflation has reached 3.8 percent, and that gives us the confidence or satisfaction that monetary policy has worked and is working through the system,” Das said at the World Economic Forum in Davos on January 18.

SBI Research Ecowrap said in its report that since the decline in core inflation is visible in both rural and urban areas and in goods and services that are quintessential to day-to-day living, to confer that core decline is a proxy for decline in demand or rural slowdown is misleading.

Despite softer inflation and easing core inflation, economists said there will be an upside risk due to food price increases.

“The overall tone of RBI policy is likely to remain cautious as the upside risk from food inflation persists. With growth conditions holding up, monetary policy focus will remain on ensuring headline inflation moderates towards the 4 percent target,” Gupta from IDFC First Bank said.

QuantEco Research said in a report dated February 12 the government’s relentless push for heavy lifting by public capex could ensure a softer bias for core inflation in FY25.

Also read: RBI may keep repo rate unchange in April policy despite easing CPI inflation, says economists

The RBI is likely to keep the repo rate unchanged at 6.50 percent in the April monetary policy despite headline inflation easing in January, economists said.

The central bank will focus on bringing inflation to its medium-term target of 4 percent and also keep in mind the risk of food inflation, experts said.

In February, the RBI’s Monetary Policy Committee left the policy repo rate unchanged at 6.5 percent for the sixth meeting in a row.