The retail inflation in the month of July came at a five-year low of 3.54 per cent, which is the lowest since August 2019. In August 2019, the retail inflation had stood at 3.28 per cent.
How good is the number?
In fact, the sharp improvement in the July numbers is due to a higher base effect. Consumer inflation had touched 7.4 percent in July 2023. Hence, a dip in July this year needs to be seen in this context.
One must note that the RBI had indicated that the July numbers will come lower due to base effect in the last round of the monetary policy but hinted that the inflation numbers may pick up in August.
Hence, it is too early to conclude that inflation has declined to the central bank’s comfort zone.
According to Madan Sabanvis, chief economist, Bank of Baroda, the major pain points remain in the cereals and pulses basket. “While inflation numbers may come down due to this effect, the new crop will enter only post September which will determine the future course of price movements,” said Sabnavis in a note.
The RBI has an inflation target of 4.5 per cent in the fiscal year 2025.
There are persisting risks to the inflation. How the monsoon will be pan out will be critical. Also, the impact of geopolitical tensions may have a bearing on global crude and commodity prices.
Locally, food prices remain tricky. Hence, the central bank will continue on a wait and watch mode till end of this year before it gets convicing signals on a sustainable easing in inflation numbers. “Net-net, we expect decline in food inflation in the coming months to drag down headline inflation to an average of 4.5%. That said, no rate cuts are expected in the forthcoming policy as RBI pursues a target of 4% durable inflation,” said D K Joshi, chief economist at Crisil.
Murthy Nagarajan, Head-Fixed Income, Tata Asset Management said CPI inflation has come at 3.54% versus 3.70% expectations for the month of July 2024. This is due to vegetable inflation falling and high base effect as last year CPI inflation was above 7% level.
“Core inflation is at 3.4% versus expectation of 3.35%. There were fears of CPI inflation coming higher as RBI has revised 2nd quarter CPI inflation forecast from 3.8% to 4.4% percent in its latest monetary policy. This will be taken as positive by the markets but we also have the US CPI data coming in the next 2 days. This data may continue the positive momentum in the debt market,” Nagarajan said.