India's CPI Inflation Likely To Drop Below 3% By July 2024: Deutsche Bank

India's headline retail inflation rate might plummet to as low as 2.9 per cent by mid-2024, provided there are no food price shocks akin to those experienced this year. The significant role of an "exceptionally favourable base effect" is anticipated in this scenario.

According to Kaushik Das, Deutsche Bank's chief economist for India and South Asia, if Consumer Price Index (CPI) inflation averages 6.4-6.5 per cent in July-September 2023, it could potentially dip below a 4 per cent average by July-September 2024 due to this base effect, barring similar food price shocks next year. Das forecasts CPI inflation at 2.9 per cent for July 2024, 3.3 per cent for August 2024 and an average of 4.5 per cent for January-March 2025.

The Reserve Bank of India (RBI) officially forecasts average CPI inflation at 6.2 per cent for July-September, 5.7 per cent for October-December and 5.2 per cent for each of the first two quarters of 2024. The last time inflation was below the RBI's medium-term target of 4 per cent was in September 2019, at 3.99 per cent.

Following data released by the statistics ministry showing CPI inflation dropping to 6.83 per cent in August, slightly lower than the consensus estimate of 7.0 per cent, Das and other economists expect further disinflation in September, possibly reaching as low as 5 per cent.

CPI inflation data for September is scheduled for release on 12 October, shortly after the RBI's Monetary Policy Committee (MPC) announces its next interest rate decision on 6 October.

Das anticipates a significant easing in CPI inflation due to disinflation in vegetable prices, possibly leading to a rate cut by the MPC. He expects a repo rate cut of 100 basis points starting in April, although markets have currently priced out expectations of rate cuts.

The volatility in vegetable prices has historically influenced inflation numbers, with spikes leading to higher-than-expected inflation and sharp corrections resulting in lower inflation figures.

Food inflation declined to 9.94 per cent in August from 11.51 per cent in July, primarily driven by a drop in vegetable prices. Das expects food prices to correct only partially from the excess spike observed in June and July.

Despite the volatility, Das has maintained his inflation forecast for October-December and January-March 2024, opting to await September's data before making adjustments.