MUMBAI (Reuters) – India’s headline retail inflation in May is likely to fall further towards 4% — the midpoint of the central bank’s target and a level last seen in January 2021, according to a few economists, who expect lower food prices to aid the decline.
India’s consumer price inflation (CPI) eased to an 18-month low of 4.7% in April, from 5.66% in the previous month, largely due to a moderation in food prices, which accounts for nearly half of the overall consumer price basket.
While the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is tasked with keeping inflation within a 2%-6% range, it is expected to try and anchor inflation close to the 4% mid-point of that band.
“Our analysis places May CPI inflation tracking around 4%, which suggests the Q2 (April-June) average is likely to undershoot the RBI’s forecast of 5.1% by as much as 60 basis points,” Nomura economists Sonal Varma and Aurodeep Nandi wrote in a note.
Inflation data for May is due on June 12. The country’s retail inflation was closest to the 4%-mark last in January 2021 at 4.06%.
GRAPHIC: Retail inflation cools down Retail inflation cools down https://www.reuters.com/graphics/INDIA-ECONOMY/INFLATION/gkvlwzymqpb/chart.png
Despite the threat of a heat wave, the rise in food prices is expected to be kept in check by lower agricultural input costs and the government’s proactive supply-side intervention, Nomura said.
Besides softer food prices, a “significant” base effect will also bolster May’s inflation data, IDFC FIRST Bank said, pegging this month’s inflation at 4.2%.
The bank has also lowered its forecast for 2023-24 to 5%, from 5.5% earlier.
Barclays expects India’s inflation to drop to 4.3% in May and to stay between 4% and 5% for the “foreseeable future,” despite the base effect beginning to wane from June this year.
The moderation in inflation, expected to continue in the near term, suggests the RBI is done with its interest rate-hiking cycle and is likely to stay on hold for longer, Barclays said in a note.
The RBI’s MPC has increased the repo rate by 250 basis points since May last year to quell inflationary pressures. Most economists expect the MPC to hold rates for the second time when it meets next month.
The moderation in inflation last month reassures the RBI that its monetary policy is on the right track, the central bank governor, Shaktikanta Das, said on Friday.
(Reporting by Siddhi Nayak; Editing by Savio D’Souza)
