India inflation eases significantly in August. Is the worst behind?

Consumer Price Index (CPI)-based inflation, or retail inflation, moderated to 6.83 per cent in August from a 15-month high of 7.44 per cent in July, thanks to a fall in vegetable prices, offering relief to the Reserve Bank of India (RBI) and bond investors even though it remained above the RBI's target range of 2-6 per cent.

As Mint reported earlier, quoting data released by the Ministry of Statistics and Programme Implementation (MoSPI), food inflation, measured by the Consumer Food Price Index, which accounts for nearly half of the overall consumer price basket, slowed to 9.94 per cent in August from 11.51 per cent in July.

Core inflation at 4.8 per cent remained in line with the market’s expectations.

Read more: Retail inflation slows to 6.83% as vegetable prices decline

Is the worst behind?

In July, retail prices in India went up by the most in 15 months, which worried investors. This increase in prices could lead central banks to use stricter monetary policies, which might harm economic growth.

A fall in retail inflation is a significant relief but experts think it is early to say that the worst is behind.

G. Chokkalingam, Founder and Head of Research at Equinomics Research underscored the sharp rise in crude oil prices and poor monsoon. They could derail RBI's efforts to curb inflation.

"We cannot say the worst is behind. Yesterday also the oil price was up 2 per cent. Late rain in September is believed to be impacting pulse crops. I still believe that inflation could be a cause of worry in the short term," said Chokkalingam.

Madhavi Arora, Lead Economist at Emkay Global Financial Services said while non-perishables are showing signs of persistence, overall food inflation is likely to reverse meaningfully. She added that crude oil price trajectory and the progress of the monsoon remain key monitorables.

"We keep an eye on monsoons and rising crude trends and how they could impact non-perishable food and input costs and how that impacts policy responses," said Arora.

"The stickiness in core inflation will be sustained before easing by Q4FY24, and core will undershoot headline inflation by 30-40bps in FY24E. We see FY24E inflation at 5.2 per cent against RBI's estimates of 5.4 per cent, with the RBI to keep rates on hold ahead, and not precede the Fed in any policy reversal in CY24," Arora said.

Brokerage firm JM Financial in its report said that while inflationary pressures have moderated notably across food categories, deficient rains and depleting reservoir levels may negatively impact Kharif yields and Rabi sowing. The brokerage firm remains cautious of any signs of persisting inflationary pressures in the food category, which may compel RBI to hike policy rates.

Jm Financial expects an upward revision of about 40bps in RBI’s inflation projection for Q2FY24 in the upcoming MPC meeting in October.

Brokerage firm Nuvama Wealth Management pointed out that the upside risks to food inflation beyond vegetables are rising.

"Rainfall deficit stands at nearly 10 per cent of LPA (long period average) as of 12 September, and reservoir levels stand at 63 per cent of live storage capacity (versus 85 per cent last year). This may impact crop output, hence prices in the short-run. In view of the higher-than-expected incoming data and rainfall deficit, we see upside risks to our FY24 headline CPI forecast of 4.5 per cent, said Nuvama.

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