A high base keeps retail inflation below 4% for yet another month

Though inflation based on the Consumer Price Index (CPI) inched up to 3.7% in August from 3.6% in July, it remained below the Reserve Bank of India’s (RBI) target of 4% for the second straight month. While the base effect has been supportive since July (mainly led by the food index), it somewhat faded in August, causing inflation rate to see a slight bump up.

Food inflation rose to 5.7% in August from 5.4% in July. That said, the sequential decline in prices kept a check on food inflation. Within food, the foodgrains inflation eased to a two-year low of 8.6%, while that in vegetables rose, compared with July.

Core (which excludes food and fuel) inflation eased 10 bps to 3.3%.

A high base has helped keep inflation under 4% since July. But September onwards, this effect is expected to fade considerably. Any further easing of inflation will depend on sustained softening of food prices.

For the fiscal, a steady progress of monsoon and kharif sowing should bring down food inflation, compared with the past fiscal. Daily food prices data shows that the prices of key food items, such as cereals, pulses, tomatoes and milk have been declining in September. A sustained drop in food inflation should help align the headline inflation to RBI’s target of 4%, allowing RBI to initiate rate cuts.

Non-food inflation is expected to remain benign as commodity prices are projected to remain soft. CRISIL expects crude oil prices to average $80-85 per barrel, close to the levels of the previous year.

In our base case, we expect two rate cuts this fiscal, with the first one in October unless risks arising from the geopolitical situation and weather shocks push the rate cut decision.