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Informist, Thursday, Jun. 12, 2025

 

By Shubham Rana

 

MUMBAI – When retail inflation declined to a 69-month low of 3.16% in April, some economists said it had bottomed out and was unlikely to moderate further. In May, inflation fell even more. Some economists now believe the June print could be even lower.

 

This vindicates the Reserve Bank of India, which last week surprised the markets with the steepest interest rate cut in five years to accelerate economic growth, economists said. The Monetary Policy Committee of the central bank Friday cut the repo rate by 50 basis points to 5.50%, against expectations of a 25 bps reduction.

 

India's headline CPI inflation fell to an over six-year low of 2.82% in May as food inflation fell to 0.99%, the lowest since October 2021. The CPI inflation in May was lower than the consensus estimate of 3.0%, according to an Informist poll.

 

The latest print shows that inflation remains well under control, even as core inflation rose to a 19-month high of 4.2% in May. The general index of the CPI rose 0.2% on month in May, lower than the historical rise seen during the summer month. On an average, the overall index had risen 0.6% on month in May in the last 12 years.

 

"Looking ahead, food inflation is likely to remain contained, supported by healthy agricultural activity and a favourable base," CareEdge Ratings Chief Economist Rajani Sinha said in a note. "Positive developments include good reservoir levels, the arrival of fresh rabi harvest, and encouraging agricultural production prospects."

 

Economists expect CPI inflation to ease further this month, with any rise in food prices likely to be more than offset by a high base effect. The base effect is such that even if the overall index rises by 0.9% on month, the average for the last 12 years, headline inflation would fall to 2.42%.

 

Barclays expects CPI inflation to fall to 2.1% in June, meaning Apr-Jun CPI inflation could undershoot RBI's projection by 20 bps. The RBI last week lowered its June quarter retail inflation forecast to 2.9% from 3.6%.

 

Similar favourable base effects could keep inflation below RBI's 4% target till October. Even core inflation is expected to remain benign over the next few months at around 4%, economists said. Core inflation, which excludes volatile food and fuel items, rose to a 19-month high of 4.2% in May, but only marginally higher than 4.1% in April.

 

This could translate to lower CPI inflation this financial year. The RBI has lowered its inflation forecast to 3.7% for 2025-26 (Apr-Mar), from 4.0?rlier. Some economists expect inflation to average even lower this year.

 

"The positive inflation surprise and near-term visibility on lower inflation suggest that the RBI may miss its inflation targets for this quarter and year, with FY26 inflation likely to form a new reset below 3.4% - much lower than RBI's current estimates, helped largely by food inflation, while core turns higher to average around 4.3%," Madhavi Arora, chief economist, Emkay Global Financial Services, said. "That could trigger the RBI's reaction function, which as of now has moved gears to a neutral stance, after rate cuts front-loading amid recent inflation downgrade to 3.7% from 4?rlier."

 

SPOILSPORT MONSOON?

Even though inflation outlook remains benign, concerns remain on the food price front, economists said. Food prices, particularly perishable items such as vegetables, tend to rise during the summer months.

 

Vegetable prices are already on the rise. According to data from the Department of Consumer Affairs, tomato prices were up 20% on month in June so far. Potato prices also increased, while onion prices continued to trend down, even as the pace of decline moderated.

 

Moreover, monsoon rains could change things. "Despite the early onset, monsoon activity has slowed, although it remains early in the season, with potential for recovery in the coming weeks. Weather-related risks will need close monitoring," Sinha of CareEdge said.

 

The southwest monsoon has drastically reduced over the country after a vigorous start in late May. As of Thursday, the weighted average rainfall over the country was 33?low normal at 30.0 millimetres so far during the season, which started on Jun. 1.

 

In contrast, the rainfall was three times higher than normal at 55.8 millimetres from May 24 to May 31. The unseasonal early rains have destroyed the onion crop across Maharashtra and other areas in central India this year, which may push up prices.

 

The RBI's inflation forecasts assume a normal monsoon. If rains don't pour water over RBI's forecasts, inflation could settle below the central bank's 4% target on a durable basis, allowing further focus on supporting growth.

 

RBI Governor Sanjay Malhotra Friday said monetary policy now has limited space to support growth. However, if monsoon doesn't play spoilsport and inflation eases on the back of the base effect, there is a slight possibility of a window of opportunity opening up in October.  End

 

Edited by Ashish Shirke

 

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