CPI Inflation Analysis: RBI Unlikely To Take Comfort From Below-Target CPI Print

With retail inflation likely to see an uptick from September onwards, the central bank is likely to look through the current phase of below-target inflation.

India's retail inflation remained at near a five-year low because of the base effect even after it rose marginally in August, driven by the rise in vegetable prices. Inflation rose to 3.65% last month, compared to 3.54% in July.

"We have marginally cut our CPI forecast for FY25 to 4.6% from 4.8% earlier," said Nirmal Bang Institutional Equities in a recent note. However, the note stated that the spatial distribution of the monsoon remains a cause for concern, indicating some expected volatility in food inflation.

Gaura Sengupta, an economist at IDFC First Bank, also stated that daily retail prices for the first two weeks of September indicate a month-on-month pickup.

A mixed trend is indicated for vegetables, with the national horticultural board showing a rise in prices of 10.4% month-on-month, while the department of consumer affairs shows a decline of 1.8% month-on-month, according to Sengupta, who expects September CPI inflation to track at 5.1% after building in a small rise in food prices on a month-on-month basis.

While core inflation is gradually bottoming out, a cut in petrol and diesel pump prices in the next few months, supported by moderation in crude oil, may provide some cushion, according to Nirmal Bang's note.

From the point of view of policy, the inflation numbers are better than expected, as the RBI had projected 4.4% for Q2 and for the first two months average 3.65%, stated a note by the Bank of Baroda. Hence, while the number will move towards 4% in September, with the base effect getting weaker, inflation will move up, it stated.

As such, the RBI will look for inflation to stay low on a durable basis and hence will be circumspect again, Madan Sabanavis, chief economist at the Bank of Baroda, said. "We believe December will be the earliest point for considering any change in policy. The monsoon has been good, but the risk factor of excess rains affecting crop prospects is something to be monitored," he added. As a result, after two sub-4% inflation prints, the RBI may still not have confidence to ease policy rates in the October meeting, Sengupta added.