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Informist, Tuesday, May 13, 2025

 

By Shubham Rana

 

NEW DELHI – The near-six-year-low April print might be as good as it gets for retail inflation in India. However, economists believe a benign food price outlook should provide the Reserve Bank of India more than enough space to continue lowering interest rates to support economic growth, which remains far from robust.

 

CPI inflation fell to 3.16% in April, the lowest level since July 2019, led primarily by a decline in food prices. Food inflation fell to a 42-month low of 1.78%, while core inflation--which excludes food and fuel items--remained steady at 4.1%.

 

Retail inflation has now declined for six consecutive months and also stayed below the RBI's 4% target for three months in a row. But inflation is unlikely to fall further with higher temperatures already pushing up prices of some key vegetables.

 

"The headline rate is probably now close to a cyclical low," Joe Maher, assistant economist at Capital Economics, said in a note. "As the economy continues to gather momentum, underlying price pressures are likely to build. But we don't expect a sharp increase, unless there happens to be a surge in food prices."

 

According to data from the Department of Consumer Affairs, prices of tomato and potato are up 4.1% and 1.8%, respectively, in May so far. Edible oil prices have also been rising for several months. Moreover, non-food prices have also begun to rise. Even as headline inflation moderated in April, the general index of the CPI rose 0.3% from March. This is the first time the general index has risen month-on-month since October. 

 

"While the recent rise in temperatures in North India and unseasonal rainfall in parts of peninsular India may cause a spike in vegetable prices in the second half of May, boosting the CPI inflation print, we project it to print around 3.5% in the ongoing month," ICRA Chief Economist Aditi Nayar said in a note.

 

The RBI's projections for the quarter ending June also indicate that inflation is likely to pick up in May and June. The central bank has projected CPI inflation at 3.6% for Apr-Jun, after which it is seen rising to 4.4% by the March quarter next year. The RBI expects CPI inflation to average 4.0% in the current financial year.

 

This higher but still comfortable inflation outlook should allow the RBI's Monetary Policy Committee--which has already reduced the repo rate by 50 basis points since February to 6.00%--to lower interest rates further. A member of the rate-setting panel hinted at this after the release of the April inflation data Tuesday.

 

Saugata Bhattacharya, external member of the panel, Tuesday told a news channel that there is space for further policy easing, but actions have to be gradual, cautious, and need to be taken on a meeting-by-meeting basis. "Inflation will remain relatively moderate; even if it goes above 4% it will not be a significant crossover of the (RBI's) target and over a long period of time, given things stay as is, we can expect it (to be) close to the target," Bhattacharya said.

 

Economists are near unanimous in expecting a rate cut at the June meeting, barring any vegetable price shocks or a sharp depreciation of the rupee amid border tensions and global trade uncertainties. There is, however, less agreement on what will happen after the June meeting, with economists' expectations of the repo rate in a wide range between 5.00% and 5.75%.

 

"A 25 bps rate cut appears forthcoming in the June 2025 policy, followed by easing of 25 bps each in the August and October 2025 policy reviews," ICRA's Nayar said. "If the GDP growth print for Q4 FY2025 (Jan-Mar) does not report an acceleration from the 6.2% seen for Q3 FY2025 (Oct-Dec), the MPC may consider frontloading the rate easing, with a 50 bps cut in the upcoming review," Nayar noted.  End

 

Edited by Rajeev Pai

 

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