April CPI inflation crashes to 18-month low of 4.7% due to favourable base

A statistical effect is expected to bring the headline inflation below 5 percent.

India's headline retail inflation rate dropped sharply for the second month in a row, hitting an 18-month low of 4.70 percent in April, according to data released by the Ministry of Statistics and Programme Implementation on May 12.

Consumer Price Index (CPI) inflation stood at 5.66 percent in March.

At 4.70 percent, last month's inflation print is broadly in line with consensus estimates, with a Moneycontrol survey showing economists expected it to decline to 4.8 percent.

Despite the huge 174-basis-point fall in inflation over the last two months, it remains above the Reserve Bank of India's (RBI) medium-term target of 4 percent for the 43rd month in a row.

One basis point is one-hundredth of a percentage point.

April CPI internals

Like in March, a favourable base effect was the primary driver of the big fall in inflation.

However, easing of price momentum was visible in some components of the CPI basket, with the indices for eggs, edible oils, and cereals falling on a month-on-month basis among food items. Food apart, the fuel and light index of the CPI was lower in April compared to March by 0.1 percent.

Meanwhile, core inflation - or inflation excluding the volatile food and fuel items - also declined sharply to 5.2 percent from 5.8 percent in March.

Policy impact

The latest inflation reading of 4.70 percent provides a strong start in meeting the RBI's inflation forecast of 5.1 percent for April-June. The RBI expects CPI inflation to average 5.4 percent in July-September and October-December before easing slightly to 5.2 percent in the first quarter of 2024.

The moderation in inflation should get a helping hand from the base effect for the first half of 2023-24. However, while the base effect will be favourable until October, it peaks in April.

If CPI inflation evolves as per the RBI's forecast, the central bank's Monetary Policy Committee (MPC) may not hike the repo rate any further. In its latest decision on April 6, the MPC left the repo rate unchanged at 6.5 percent, but said it would not hesitate to take further action in future meetings, if required. Governor Shaktikanta Das clarified further, saying the status quo was "a pause, not a pivot".

However, economists are not convinced and think the MPC is done with its hiking cycle after raising the policy rate by 250 basis points in 2022-23.

The MPC is scheduled to next meet during June 6-8.