Impact: Positive (interest rates), Negative (Consumer Demand, nominal GDP growth, Gross Tax Revenue (GTR))

Brief: Consumer inflation stands at 2.86% for March, 2019, which is 30 bps higher than the previous month. The improvement in the overall inflation is attributed to recovery in food prices. Food articles such as vegetables and pulses that were deflating at a double-digit rate for the past few months have shown signs of improvement. For the uninitiated, the Inflation rate for these commodities had been recorded at (-) 1.5% and (-) 2.3%, respectively during the said period. Overall core inflation however has decelerated to a seventeen-month low figure of 4.77% in March 2019, on account of weak consumer demand. Going forward, we believe that the recent uptick in commodity prices and expansionary monetary policy will lead to an upside bias in this category.

Consumer inflation stands at 2.86% for March, 2019, which is 30 bps higher than the previous month. The improvement in the overall inflation is attributed to recovery in food prices. Articles such as vegetables and pulses that were deflating at a double-digit rate for the past few months have shown a sign of improvement. For the uninitiated, inflation rate for these commodities has been recorded at (-) 1.5% and (-) 2.3%, respectively during the said period. It is worth mentioning that there is no base effect in pulses inflation rate as the commodity price has remained in negative trajectory for over two successive years (-22% in FY18 and -8.3% in FY19). With the improvement in these commodities, the overall food inflation has improved to 0.3%. It is noted that the food inflation was in a secular decline for five months previously before turning positive in March 2019.

Our major concern currently pertains to sugar and fruit prices – items which have been showing continuing signs of supply-demand mismatch. Sugar price is continuing its fourteen month long downward trend and deflated by (-) 6.1% in March 2019. Since sugar production is expected to reach an all-time high in FY20, this price trend is expected to continue in FY20 as well. Similarly, fruit prices have been decelerating since December 2018 and reached (-) 5.9% in March. Going forward, food inflation will be neutralized by the de-growth seen in these two commodities.

On the core category side, the overall core inflation has decelerated to a seventeen-month low of 4.77% in March 2019, on account of weak demand. However, we are optimistic about the core inflation. We believe that the recent uptick in commodities prices and expansionary monetary policy will lead to an upside bias in this category. Therefore, core inflation is expected to improve in the medium term.