After dealing in ranges higher than 4.8 per cent for several months, the country’s consumer price index (CPI) inflation settled to 3.65 per cent in August 2024, the second-lowest in the last five years. While the rate increased compared to the year-on-year (YoY) inflation rate based on all India CPI for July 2024 (3.6 per cent), the past two month’s data indicate that the country is finally witnessing a much-needed dip in retail inflation. Still, the question remains the same- Is the dip durable?
The ‘August’ Numbers
As the retail inflation clocked at 3.7 per cent in August 2024, the subgroups of spices, meat, fish and pulses products reported a decline in inflation. At the item level, the Ministry of Statistics and Programme Implementation data showed that tomatoes, which reported a surge in prices in the previous months, exhibited the lowest year-on-year inflation at negative 47.91 per cent.
Despite a healthier rainfall and a decline in food prices, the unfavourable base effect caused the elevation in food prices in August. Food and Beverages inflation rose up to 5.3 per cent for the month. The Food inflation came in at 5.66 per cent for August, the second lowest since June 2023.
“India's retail inflation in August 2024 dropped to a near five-year low of 3.65 per cent, a significant improvement from last year's 6.83 per cent. Even with the recent increase in vegetable prices, the overall trend remains positive. This is a reassuring sign for the economy, showing that inflationary pressures are gradually easing,” stated Nishant Shrivastava, Chief Executive Officer (CEO), Torus Wealth.
How Relevant Is CPI Inflation?
In the last few months when the country registered high rates of food inflation which propelled the CPI inflation numbers on an elevated trajectory, industry experts suggested that the Reserve Bank of India (RBI) should look through the movements in food price inflation and exclude the food inflation from the CPI inflation. Food and beverages make up around 45.8 per cent weight of the current headline CPI basket.
“The food-price inflation feeds through to core inflation as producers mark up the prices of other products. Food-price inflation, which is captured by headline inflation, has predictive content for future core inflation, in other words, and should not be disregarded,” stated Barry Eichengreen and Poonam Gupta in a paper by the National Council of Applied Economic Research (NCAER).
The RBI Governor Shaktikanta Das highlighted the importance of such a component of inflation during the Monetary Policy Committee (MPC) meeting on 8 August 2024. “The public at large understands the inflation more in terms of food inflation than the other components of headline inflation. We should not become complacent merely because the core inflation has fallen considerably,” stated the apex bank governor.
The Monsoon Bonanza
As the country received surplus rains during August, the cumulative kharif sowing too registered healthy growth. The monsoon plays a crucial role in determining the food prices across the country and a healthier monsoon has led to the decline in food inflation in the past two months. As per the data from the Indian Meteorological Department (IMD), the southwest monsoon was above normal at 107 per cent of the long-period average (LPA) at the end of August.
As per the latest data from the Agriculture Ministry on 9 September, India's kharif crop sowing is progressing steadily, with farmers planting crops across 1,092.33 lakh hectares so far, as against 1,069.29 lakh hectares from last year. On a yearly basis, the sowing is about 2.15 per cent higher.
“Going ahead, it is expected that rising kharif production boosted by an above-normal southwest monsoon will contribute to further softening CPI inflation, with further improvement in food supplies, said Sanjeev Agrawal, President, PHD Chamber of Commerce and Industry (PHDCCI), in a press statement.
Is the Dip Durable?
Now comes the most important question. Is the dip seen in the CPI inflation in the past few months going to be sustained in the longer run? To answer this, we need to look at a very crucial element. The base effect phenomenon. The dip in the inflation has been attributed to a favourable base effect, even by the apex bank’s governor. As per the industry experts, the recent dip is just a phase and the inflation is likely to rise in the coming months and quarters.
“Looking ahead, the base effect will turn unfavourable in September ahead of an early festive season this year. A benign core inflation underscores the fact that the healthy growth momentum has largely been disinflationary. Even though the outlook of food inflation has improved, risks to food inflation have not been entirely mitigated,” as per the analysis by CareEdge Ratings.
Ratings Agency Icra has stated that the CPI inflation is set to rise to 4.8 per cent in September 2024 due to the fading of the favourable base effect. The apex bank governor has reiterated the importance of staying the course and stated that policymakers should stay resolute.
“Inflation has been brought within the target band of 2 to 6 per cent, but our target is 4 per cent. Over the last several monetary policy meetings, we have been reiterating the importance of staying the course and not getting carried away by some dips in inflation,” stated the central bank governor at a forum by the Bretton Woods Committee in Singapore.
A change in Policy Stance?
While the governor has clearly stated that he was in no rush regarding the relaxation in the policy measures, the industry experts have not ruled out the possibility of a change in the policy stance from the central bank during its next meeting.
“With the first quarter gross domestic product (GDP) growth recorded at 6.7 per cent, below the RBI's estimate of 7.1 per cent, and Q2 inflation expected to remain below the RBI’s forecast of 4.4 per cent, along with CPI inflation stabilising below the 4 per cent target due to the cooling of food prices, the RBI may consider rate cuts in the forthcoming MPC meetings,” stated Vijay Kalantri, Chairman MVIRDC WTC Mumbai.
With Q1 FY2025 GDP print having undershot Monetary Policy Committee's (MPC’s) forecast, a change in policy stance in the October 2024 meeting cannot be entirely ruled out. It will be interesting to see the stance of the apex bank regarding the sudden change in the inflation trajectory.
