The October spike in headline inflation to 6.2% closed the doors on a December rate cut.The main culprit was the spurt in vegetable prices, 42% higher this October comparedwith the last. Non-food inflation was benign at 3%.
In our base case, we expect food inflation to nudge down, with supplies improving in thecoming months, preparing the ground for a February rate cut. However, we expect ashallow current easing cycle, with a total 100-125 basis point rate cut. Needless to add,monetary policy will remain vigilant of supply shocks in the scenario of healthy growth.
In addition to impacting rate cut decisions, high food inflation also eats into thediscretionary consumption spending power of households. The sharp drop in privateconsumption growth to 4% in fiscal 2024 is concerning since private consumptionaccounts for over 55% of India’s gross domestic product (GDP).
Although private consumption growth improved in the first quarter of the current fiscal,high-frequency indicators suggest it decelerated in the second quarter.
Overall, we expect private consumption to do better than the previous year due to thebase effect and a rebound in rural consumption, which is ~60% of total privateconsumption as per the 2022-23 consumer expenditure survey.
In fiscal 2024, weakness in consumption was more of a rural phenomenon due to poorperformance of agriculture. This year, with healthy rains, agriculture is expected torebound and support rural consumption. Also, rural wages have grown faster thaninflation, implying positive real growth.
Rural-focused items, such as two-wheelers, have performed significantly better in ruralregions compared with urban ones. The government’s emphasis on asset-creating andemployment-generating schemes, such as affordable housing, will also support ruraldemand going ahead.
On the other hand, this year, urban consumer sentiment is weak. This is due to theimpact of rate hikes and the slowing growth in services, which have a higher penetrationin urban areas. The Reserve Bank of India’s (RBI) consumer surveys also indicate adeclining trend in urban consumer confidence. High interest rates affect urban demandmore significantly, since these areas have higher credit penetration.
The anticipated decline in food inflation is likely to provide mild support to discretionaryspending, particularly among low-income households, who allocate a larger portion oftheir budget to food.
And finally, the global environment has grown more uncertain with anticipated policychanges following Donald Trump’s re-election as President in the United States (US). Theincrease in US tariffs remains a key monitorable. Over the next few months, we will keepa close eye on this and update on the implications of US policy changes.
