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Inflation risks continue to ebb

Key takeaway: The headline CPI print for Jan-24 moderated to 5.1% YoY from 5.69% in Dec-23 on the back of moderating food prices, predominantly perishables. A consistent downtrend in core CPI will likely comfort the RBI, although a rate cut looks unlikely till the headline inflation moves durably closer to 4%. The recent strong data from the US and push-back of rate cut expectations should also keep the RBI guarded against early policy easing. We reiterate ‘change in stance’ by the MPC in Q1FY25, with first cut in Q2 and overall 75bps cut for FY25E. We retain our inflation estimate at 5.3% for FY24E and see FY25E CPI averaging at 4.5%. 

Core inflation, lowest since Dec-19; headline declines MoM

Jan-24 headline inflation came in at 5.1% YoY versus 5.69% in Dec-23, declining MoM for two months, led by food and beverages deflation as vegetable and spices witnessed deflation by 4.2% and 1.26% MoM. Pulses inflation declined by 0.92% MoM – the first drop since Feb-23, indicating that the decade-high YoY pulses import growth in Q3FY24 has started to impact pulse prices positively. The food basket that can potentially un-anchor household inflation expectations – comprising vegetables, pulses, spices, oils and fats – declined by 1.77% MoM in Jan-24 on an average versus Apr-Dec FY24 average inflation of 1.7%. 

Core CPI continued its downward trajectory with Jan-24 print coming in at 3.59% YoY versus 3.89% in Dec-23, easing from 12-month high of 6.05% in Feb-23. Personal care and effects, and households goods and services components dropped sequentially MoM by 43bps, and 11bps each respectively. Overall global commodity prices declined for the third straight month in Jan-24 on YoY basis, indicating that upside risks to wholesale prices may remain at bay in the upcoming months, which bodes well for core inflation.

Retain FY24E CPI at 5.3%; first rate cut by RBI likely in Q2FY25

Despite the easing inflation trajectory, the transition to rate cut cycle is expected to be gradual, with change in stance in Q1FY25 and first rate cut in Q2, as the MPC maintains an unwavering focus on durably maintain 4% inflation target and looks for signals from the Federal Reserve regarding the timing of the first rate cut.

In our view, food prices continue to remain the primary risk to overall inflation situation in India for FY25, but 79% chance of transition from El Nino to ENSO-neutral situation (source: NOAA) provides hope of less adverse shocks to the monsoons. While commodity prices remain muted and geopolitical tensions are yet to hurt the supply side, potential flash points resulting in escalation and elongated uncertainties warrants caution. A downtrend in core CPI remains the key tailwind, along with expected muted crude oil prices.

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