India’s CPI inflation remained steady at 3.65% YoY in Aug-24 vs. 3.60% (revised up from 3.54% reported earlier) in Jul-24. The headline inflation print was slightly higher than the market consensus expectation of ~3.5%.  

Key highlights of Aug-24 data

·   On a sequential basis, CPI was unchanged, implying no sequential change. This is significantly lower than the series median sequential increase of 0.55% in the headline index associated with the month of August.

·     Annualized food and beverages inflation rose moderately to 5.30% in Aug-24 after dipping to a 13-month low of 5.06% in Jul-24. This increase was on account of an adverse statistical base. Sequentially, the F&B price index fell by 0.30% MoM, registering its first decline in 7-months.

o   Sequential price pressures eased in Aug-24 on account of items like Meat and fish, Eggs, and Vegetables (of which Tomatoes and Beans saw a double-digit decline in MoM prices).

o   On the other hand, Fruit prices hardened considerably (2.63% MoM) along with a moderately strong jump in the price of cereals, led by coarse cereals and wheat.

·   Consolidated fuel inflation remained in negative territory for the twelfth consecutive month, albeit rising marginally to -4.6%YoY from -4.7% in Jul-24. On a sequential basis, the index edged up by 0.3% amidst a rise in the price of Kerosene, Coal and Coke.

·   Core CPI inflation (captured by CPI excluding indices of Food & Beverages, Fuel & Light, and petrol and diesel items within the Miscellaneous basket) eased modestly to 3.5% YoY from an upwardly revised print of 3.6% in Jul-24. The moderation in core inflation was due to a sequential drop in the price of Gold and Silver items that benefited from the reduction in custom duties announced in the FY25 Union Budget. The adjustment in telecom tariffs that provided a leg up to core inflation in Jul-24 now appears to have normalized.

Inference and Outlook

The overall inflation print for Aug-24 offers a mixed picture. The sequential price correction in the food basket has commenced. However, there are shades of both comfort and discomfort.

·       Prima facie, the drop in vegetable prices in Aug-24 has underwhelmed after the strong build-up seen over Jun-Jul 2024. Price pressures continue to persist for staples like Onions, even as the correction in tomato prices continues.

·   Although the rainfall bounty in the last two months has helped to generate a surplus, unevenness in precipitation and the risks of excess rains in some regions could potentially create some near-term volatility.

·       Having said that, the overall progress of the southwest monsoon season with a cumulative rainfall surplus of 8% above the long period average bodes well for the incoming kharif output from Oct-24 onwards. This should help exert seasonal corrections in overall food prices.

·       The likelihood of the emergence of La Nina weather conditions later in the year could potentially support the rabi crop.

International crude oil prices have corrected sharply over the course of the last two weeks amidst a buildup of concern over global demand conditions. On a monthly basis, the price of Brent in Sep-24 is currently tracking USD 74 pb, the lowest in the last 33-months. If crude oil prices stay subdued, then a reasonable possibility arises of a downward adjustment in the retail price of petrol and diesel, as per media reports. The previous adjustment (price cut of Rs 2 each for petrol and diesel) by the Oil Market Companies was done ahead of the general elections in the month of Mar-24. A similar move in terms of the magnitude of downward price adjustment in the retail price of petrol and diesel before some state elections could see a potential disinflationary impulse of up to 20 bps. The impact could be higher if LPG prices also undergo a downward adjustment.

While that will give comfort to the MPC, we are cautious of the escalation in trade cost due to the persistence of the Red Sea crisis because of which container costs have escalated sharply, clocking an average annualized increase of ~232% in last 5-months. High transportation costs for merchandise trade could have a lagged impact on core inflation.

Going forward, we expect headline inflation to increase to the 4.5-5.0% range in the near-term with fading of the favourable statistical base effect. Having said that, we continue to believe that the impact of the expectation of weather-related respite on food prices would help glide average CPI inflation lower towards 4.5% in FY25 from 5.4% in FY24.

Says Suman Chowdhury, Executive Director and Chief Economist, Acuité Ratings & Research “August retail inflation was in line with our expectations, largely helped by the high statistical base. While there has been a modest annualized increase in food and beverage inflation to 5.3% from 5.1%, there is a slight sequential contraction of 0.30%, indicating some progress towards disinflation in food prices. While the monsoon has been favourable so far, there are still risks of excessive rains and floods in some parts of the country that can impact the expected downward trajectory of food inflation.

Core inflation has continued to stay benign at 3.5%; however, we expect the latter to move gradually towards 4.0% in the second half the year, supported by strong economic activity. Further, the benefit of the strong base is set to fade soon and may lead to a material pick up in the headline inflation over the next few months.

While the likelihood of a rate cut by RBI in the near term is very limited, any persistence of the headline inflation below 4.5% for a few months due to developments like a retail fuel price cut on the back of lower crude oil prices, along with the expected rate cuts from US Fed, may lead RBI to a shallow rate cut of 25 bps between Dec’24-Feb’25.”

Table1: Overview of key sub-components of inflation

Note:

1) CPI-Consolidated Fuel index includes Fuel & Light and Petrol & Diesel indices from the Miscellaneous basket

2) CPI-Core excludes Food & Beverages and Consolidated Fuel indices from Headline CPI

Chart 1: Annualized inflation in food, fuel, and core items remained steady in Aug-24

Chart 2: At an overall level, pick-up in rainfall activity since Jul-24 bodes well for the incoming kharif produce from Oct-24 onwards