Economy News

Experts forecast FY25 CPI inflation at 4.5%; geopolitics, crude prices key concerns

Experts and economists estimated FY25 inflation to average 4.5 per cent. The CPI-based inflation for the month of March eased to a five-month low of 4.85 per cent from 5.09 per cent in February and 5.66 per cent in March 2023.

With March Consumer Price Index (CPI) based retail inflation eased to a five-month low of 4.85 per cent mainly due to cooling food prices, experts and economists estimated FY25 inflation to average 4.5 per cent. “Taking the data and early price indicators for April into account, we are tracking CPI inflation for April at 4.8 per cent YoY. While vegetable prices are currently showing some increase (especially for potatoes), the effect from the reduction in LPG prices as well as petrol and diesel prices should continue to have a dampening impact on April inflation. For now, we do not expect a significant passthrough from higher brent prices to affect India’s inflation, with the government likely to maintain retail prices, especially because of elections. For FY24-25, we expect inflation to average 4.5 per cent,” said Shreya Sodhani, Regional Economist, Barclays.

The CPI based retail inflation was 5.09 per cent in February and 5.66 per cent in March 2023. Previously, CPI-based inflation was the lowest at 4.87 per cent in October 2023. According to the data released by the National Statistical Office (NSO), the inflation in the food basket was at 8.52 per cent in March, down from 8.66 per cent in February. 

Nikhil Gupta, Chief Economist, MOFSL Group, said, “As expected, India’s inflation was at 10-month low of 4.85 per cent YoY in Mar’24 (BMBG consensus and our forecast of 4.9 per cent), implying that inflation was 5.4 per cent in FY24, the lowest in four years.”

Murthy Nagarajan, Head-Fixed Income, Tata Asset Management, said, “This CPI inflation number is along expected lines. Food inflation at 8.52 per cent is keeping inflation above the RBI target of 4 per cent. The state loan auction is also low at Rs 1900 crore. The ten year which has touched 7.18 per cent should go back towards 7.15 levels on Monday.”

Sanjeev Agrawal, President of PHDCCI, said that continued decline in food and beverages inflation and fuel and light inflation have softened the CPI inflation trajectory in March. “Proactive measures by the Government to strengthen the supply chains are leading to a decline in prices of food products coupled with continued softening of fuel and light prices. Softening of rural and urban retail inflation is helping the inflation trajectory to become benign,” he added. 

Although there has been a broad-based moderation in the overall CPI basket, food inflation persists at elevated levels despite marginal deceleration. High food inflation is led by double digit growth in the vegetables, pulses, eggs, and spices. Rajani Sinha, Chief Economist, CareEdge Rating, said, “Contrary to the previous month, food inflation has shown moderation, decreasing to 7.7 per cent from 7.8 per cent in February. The sustained inflationary trend in some non-perishable food categories, such as pulses and spices, raises concerns about the potential broadening of price pressures due to their inherent stickiness. However, it’s important to note that supply-side interventions in the form of Open Market Sale Scheme (OMSS) and export restrictions by the government, have played a pivotal role in easing food inflation. The outlook of food inflation has also improved with increased overall acreage in rabi sowing compared to the previous year and expectations of a normal monsoon with a waning El Nino condition. The arrival of the rabi harvest in the market is expected to contribute to the cooling of food inflation.”

Key risks and monitorables going forward

While economists forecast FY25 inflation to average between 4.5 and 4.8 per cent, what really are the looming risks to it? Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA Ltd, said, “ICRA estimates the food & beverages inflation to remain above the 7.0% mark in April 2024. An intensification of the impending heatwave may worsen the seasonal uptick in prices of perishables, heightening the criticality of a favourable monsoon in 2024 to keep food inflation in check and inflationary expectations well-anchored.” 

She further added, “The ongoing uptrend in international crude oil prices could also pose a risk to the CPI inflation outlook in the near term, although the extent of the impact would depend on the pass-through to retail fuel prices, and the impact of such transmission would be relatively lesser compared to the WPI inflation given the different weights of fuel items in the CPI and the WPI baskets.”

Shlok Srivastav, Co-founder and COO, Appreciate, said that deflation in the fuel and light category continued for this month as well on the back of a series of cutbacks in LPG and fuel prices. However, she added, “Geopolitical risks, Brent crude prices hovering over the $90 level and a broad-based rise in global commodity prices still loom ominously over India’s inflation trajectory.”

Meanwhile, Suman Chowdhury, Chief Economist & Head of Research, Acuité Ratings & Research, said, “While the sequential inflation has been quite benign for food and beverages at 0.2 per cent MoM in Mar’24, the concerns around food inflation remain given the prediction of an intense summer over the next 2-3 months. On an annualized basis, cereal inflation remains high at 8.4 per cent along with a significant increase in egg, fish, and meat category to 6.7 per cent in March. With reduced availability of animal feed in the summer months, there can be a further rise in the latter category.”

Dharmakirti Joshi, Chief Economist, CRISIL, said, “In our base case, we expect CPI inflation to ease to 4.5 per cent this fiscal, from 5.4 per cent in the last. The risks to food inflation appear to be somewhat tilted upwards due to weather related uncertainties.”

Continued government interventions on the supply side and recent reductions in LPG and fuel prices are expected to mitigate any potential upward price pressures. However, per economists, it’s crucial to note that external risks to the inflationary outlook have intensified. 

Bearing on RBI’s rate cut decision

With core inflation benign, economists expect RBI to maintain the status quo on the monetary policy till August 2024. Rajani Sinha from CareEdge Rating, said, “Given that the RBI Governor has been highlighting the aim of getting inflation to 4 per cent on a durable basis, the policy rates are likely to be kept on hold with no change in stance. We anticipate that the MPC will contemplate rate cuts in the third quarter of FY25.”

“Growth momentum holding up reasonably well offers further space to keep monetary policy disinflationary via unchanged policy rates and liquidity management. We think the MPC will see no urgency to cut rates, especially while the Federal Reserve stays on hold and expect cuts to start in August, when inflation is likely to trend lower on a more durable basis,” said Shreya Sodhani from Barclays.

Leave a Reply

Your email address will not be published. Required fields are marked *