Bharat’s benchmark inflation rate has plummeted to a five-year low of 3.54 per cent in July, falling well below the Reserve Bank of India’s target of 4 per cent. This marks the lowest inflation rate since August 2019, when it stood at 3.28 per cent.
The decline from 5.1 per cent in June to 3.54 per cent in July is largely attributed to a favourable base effect — a situation where a higher inflation rate in the same month of the previous year magnifies the current decrease. On a month-to-month basis, inflation increased by 1.4 per cent between June and July.
The July inflation figure aligns closely with the 3.6 per cent projection by Bloomberg economists.
The Monetary Policy Committee-MPC of the RBI had revised its inflation forecast for the quarter ending September 2024 from 3.8 per cent in June to 4.2 per cent in August while maintaining its annual inflation projection for 2024-25 at 4.5 per cent.
Despite these adjustments, the MPC chose to keep interest rates unchanged and continue its focus on withdrawing monetary accommodation.
Economists are cautiously optimistic about the inflation trajectory, barring any major disruptions from the monsoon, which currently seems unlikely.
The substantial drop in retail inflation, measured by the Consumer Price Index (CPI), from 5.1 per cent in June to 3.54 per cent in July is primarily due to a favourable base effect. Inflation in July 2023 was 7.4 per cent, while in June 2023, it was 4.9 per cent.
The base effect is even more pronounced in food inflation, particularly for vegetables. Food inflation fell from 9.4 per cent in June to 5.4 per cent in July, with vegetable prices shifting from a 0.7 per cent contraction in June 2023 to a 37.4 per cent increase in July 2023. This led to a decrease in vegetable inflation from 29.3 per cent in June 2024 to 6.8 per cent in July.
While some food categories saw significant improvements, such as a 17-month-long contraction in edible oils ending with a 1.2 per cent decline, other categories like pulses (14.8 per cent), cereals (8.1 per cent), and meat, egg, and fish (6 per cent) saw relatively high inflation rates.
The favourable base effect is expected to diminish over the September quarter, with the MPC forecasting a rise in inflation to 4.4 per cent for the quarter and 4.7 per cent for the December quarter. Core inflation, which excludes food and fuel, has recently bottomed out at 3.34 per cent in July, compared to 3.16 per cent in June. This trend was anticipated by the MPC, which noted signs of core inflation stabilising.
Economists suggest that the future inflation trajectory might not be entirely predictable. HSBC Chief India Economist Pranjul Bhandari highlights that if the recent trend of a 10 per cent month-on-month fall in vegetable prices continues, there could be downside risks to inflation forecasts.
Barclays economists also project a CPI inflation of 3.4 per cent for August, driven partly by a high base, but acknowledge that recent vegetable price trends have been unusually large and challenging to forecast.
The performance of the monsoon will remain crucial in determining future inflation trends. Despite a surplus in overall rainfall and crop sowing, significant regional variations in rainfall could impact inflation.
Industrial activity, measured by the Index of Industrial Production (IIP), showed a slowdown between May and June, with growth rates dropping from 6.2 per cent to 4.2 per cent. The deceleration was noted in manufacturing and electricity sectors, despite an increase in mining growth.
Manufacturing, which constitutes 77 per cent of the index, saw a significant slowdown, with consumer non-durable goods falling into contraction. The June IIP figure was below both Barclays’ and Bloomberg’s estimates, reflecting a larger-than-expected sequential decline in manufacturing.
