Perspective on CPI Data by Ms. Rajani Sinha, Chief Economist, CareEdge Ratings
Below the Perspective on CPI Data by Ms. Rajani Sinha, Chief Economist, CareEdge Ratings
“In December, the CPI inflation moderated to 5.2% from 5.5% in November, primarily due to a slowdown in food inflation. The inflation rate for vegetables continued to ease, dropping to 26.6% in December from 29.4% in November. Vegetable inflation has been a significant contributor to overall CPI inflation in the recent months, averaging ~ 36% since September. Just by excluding vegetables, CPI inflation stood at 3.9%, below the RBI’s target of 4%. In addition to the decline in vegetable inflation, ongoing deflation in spices and a fall in inflation of pulses and sugar have further contributed to the overall decrease in food inflation. However, the inflation for edible oils has increased, remaining in double-digit territory for the past two months. Meanwhile, core inflation continues to remain subdued, staying below the 4% mark over the past year.
The outlook for agriculture remains positive, with good Kharif production. Prospects for Rabi sowing also remain conducive with healthy reservoir levels. The Rabi sowing has progressed well and is up marginally compared to last year as of end of December 2024. As a result, inflationary pressures within the food basket should continue to ease. However, given our import dependence for edible oil, it would be crucial to monitor inflation in this category amidst high global edible oil prices and the recent hike in import duty on this item.
Subdued global commodity prices amid concerns over global demand should further support the moderation of headline inflation going forward. In December, the Bloomberg commodity price index declined by 1% YoY, and Brent crude prices fell by 5.4% YoY. However, it is crucial to monitor geopolitical developments closely, as these could significantly influence global commodity markets and supply chains. Expected moderation in inflation in coming months, will allow the MPC to consider a policy rate cut amid slowing growth. We anticipate that headline inflation will fall below 5% by Q4 FY25, driven by a moderation in food inflation. This would create an opportunity for the MPC to consider a 25-bps reduction in policy rates in the February meeting. We expect inflation to average 4.8% and 4.5% in FY25 and FY26 respectively.
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