India’s CPI inflation moderated further but slightly in line with expectations to a 10-month low of 4.85%YoY in Mar-24 from 5.09% in Feb-24 (Refinitiv consensus: 4.91%). With this, the full year average CPI stood at 5.4% - conforming to RBI’s forecast and slightly lower than our forecast.

Key highlights 

• On sequential basis, CPI index remained unchanged in Mar-24, implying a sequential momentum of 0.0% - lower than the average sequential increase of 0.29% typically seen in the month of March. 
  
• At a granular level, Food & Beverages index rose by 0.16%MoM – a tad lower than 0.28% increase typically recorded in the month. Continued softening of prices of – Vegetables, Oils & fats, Sugar and Eggs offered comfort, offsetting the build-up in Fruits, Cereals and Meat & Fish. Despite this, food inflation was sticky, remaining in a tight range of 7.6-7.8% for the third consecutive month. 
• Consolidated fuel inflation remained in negative territory for the seventh consecutive month, with Mar-24 print coming at a 4-year low of -2.7% YoY vs. -0.6% in Feb-24. This captured the partial impact of LPG price reduction by Rs 100 per cylinder (announced on Mar 8, 2024) along with Petrol and Diesel by Rs 2 per litre each (announced on Mar 15, 2024). 
• Core CPI inflation (captured by CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel items within Miscellaneous basket) continued to remain close to its series low of 3.5% YoY. Over the last 1 year, core inflation has fallen sizeably by 250 bps, amidst broad-based moderation led by Clothing & footwear, Household goods & services, Health, Housing, and Personal care & effects. 

Outlook on inflation

India’s headline inflation dynamics continue to offer a sense of comfort, as it maintains the pace of moderation, albeit more gradual over the last few months. This is reinforced by nearly 55% of total number of items within the CPI basket currently witnessing inflation in the 2-6% target band.

Nevertheless, food inflation continues to remain a source of concern amidst weather vagaries and climatic changes. Over the last one year, sporadic and frequent increase in price of select food items has continued to impart stickiness to food inflation. In addition, IMD forecasting severe heat waves in the months of Apr-Jun-24, could mean food price pressures remaining somewhat elevated through Q1 FY25.

Having said, early indicators point towards a switch from El Nino to Neutral conditions, already underway, which could further ease to La Nina conditions by Jul-24. This augurs well for India’s Southwest monsoon outlook. Private forecaster, SkyMet in its advance forecast, has pegged Southwest monsoon at 102% of LPA in 2024, with a favourable intertemporal and spatial distribution. This could potentially offer reprieve to food inflation in the upcoming quarters.

While the favorable impact of reduction in LPG, petrol and diesel prices will linger onto to the CPI print in the first quarter of FY25, adverse geopolitical backdrop, supply constraints and resilience in growth have pushed global crude prices higher, to a near 6-month high recently. Brent crude oil price, so far in Apr-24 has averaged at USD 91 pb, i.e., 6.5% higher compared to Mar-24 average USD 85.4 pb. We will maintain a close watch on the trajectory of commodity prices in the coming months, for any possible upside risks that they could impart, particularly in the context of a recent escalation in the ongoing conflict in West Asia.  

Overall, we believe that disinflation momentum in FY25 will continue to be led by fuel and core items. Keeping in mind the cut in LPG, petrol and diesel prices we have revised our FY25 CPI inflation forecast lower to 5.0% vs. 5.4% in FY24. 

Says Suman Chowdhury, Chief Economist and Head – Research “CPI inflation for Mar-24 dipped marginally below 5.0%, in line with our expectations. Further, the print for the fourth quarter of the last fiscal stood at 5.01%, a moderate reduction from the 5.37% in the third quarter. The average print for the full year FY24 settled at 5.4% compared to the 6.7% in FY23 despite the impact of El Nino and sticky food and beverage inflation which averaged 7.7% in both the previous two quarters.

The disinflation in fuel prices is currently driving the narrative for headline inflation in India. Consolidated fuel inflation witnessed a 4-year low of -2.7% YoY in Mar-24 mainly on account of the reduction in LPG and retail petrol prices effected by the government. Further, the comfort emerged from the Core CPI inflation (excluding all food and fuel components) which remained stable at 3.3% in Mar-24.

While the sequential inflation has been quite benign for food and beverages at 0.2% MoM in Mar-24 and there is a prediction of a normal monsoon in CY24, the concerns around food inflation remain given the prediction of an intense summer over the next 2-3 months. On an annualized basis, cereal inflation remains high at 8.4% along with a significant increase in fish and meat category to 6.7% in March. With reduced availability of animal feed in the summer months, there can be a further rise in the latter category.

Overall, we expect CPI inflation to average at 5.0% in FY25 despite the current disinflationary trends in fuel. We need to be watchful of the increased risks of an escalation in the geo-political conflict in West Asia and its impact on global crude oil prices which have already touched USD 90. In the aftermath of the general elections, any sustained increase in global prices is likely to see a pass through in domestic retail fuel prices.

Given such uncertainties, we expect RBI to maintain the status quo on the monetary policy till August 2024.”

 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: Private forecast SkyMet has pegged Southwest monsoon at 102% of LPA, as per early forecasts