The easing of pricing pressures in August has provided some relief, but it may not align with the Reserve Bank of India’s (RBI) projected inflation path. The consumer price index (CPI) inflation dropped to 6.8% year-on-year in August from a 15-month high of 7.4% in the previous month, but the CPI trajectory for the first two months of the September quarter (Q2FY24) has averaged higher than the RBI’s projection of 6.2% for the quarter. To meet the RBI’s projections, the CPI print in September would need to ease significantly.
The RBI has penciled in a significant easing in price pressures in H2FY24, but there are challenges ahead. Poor monsoon progress in September and lingering concerns about El Nino-related weather conditions pose upside risks to food inflation. Inflation in cereals and pulses remains in double digits, and vegetable prices are at their second-highest reading in almost 40 months. Adverse base effects for fruit and vegetable prices are also expected to kick in by the end of 2023.
Non-food inflation also faces risks, particularly in fuel prices, which rose in August after a steady decline. If international crude oil prices continue to rise amid supply cuts, it could add further upside pressure to fuel inflation. While core inflation has softened in recent months, it is expected to see some uptick due to increased consumer spending during festivals.
Given the upward pressure on inflation from various sources, there may be a need for some policy recalibration by the central bank. Interest rate cuts by the RBI appear unlikely for now, especially considering the robust economic momentum. The combination of elevated inflation and strong growth dynamics may lead to a higher-for-longer pause in policy rates.
The RBI faces a challenging scenario with inflation remaining above its projections. The central bank will need to carefully monitor food and fuel prices, as well as global oil market trends, to make informed policy decisions. While a policy rate cut is currently unlikely, the RBI may consider other measures to manage inflation while sustaining India’s economic growth. The coming months will be critical in determining the course of monetary policy and its impact on India’s economy.