Headline CPI inflation at 4.75% and core inflation at 3% were marginally lower than April levels. Inflation continues to pan out as we had expected-only a gradual moderation toward the RBI's 4% target. We maintain our FY2025 average inflation estimate at around 4.4%. We continue to expect a shallow rate cut cycle, starting in December, with the stance changing to neutral either in October policy or along with rate action.
Food inflation remained elevated in May
May CPI inflation at 4.75% (Kotak: 4.8%) remained around the April print of 4.83%. Food inflation was at 8.7% (April: 8.7%), with a mom increase of 0.7% (April: 0.7% mom), led by meat and fish, eggs, vegetables and pulses (Exhibits 1-3). Durable food inflation fell to 6.3% from the April print of 6.8% (Exhibit 4).
Core inflation continues to fall
Core inflation (CPI excl. food, beverages, and fuel) continued to fall and was at 3% (April: 3.2%)-the lowest since the start of the series. Core CPI increased 0.2% mom (April: 0.5% mom). Various core inflation metrics continued trending down (currently at levels below 3.5%) and will continue to provide comfort to the RBI (Exhibit 5). We expect core inflation to average 3.8% in FY2025.
Gradual decline in inflation
We continue to see only a gradual moderation in headline inflation toward the RBI's 4% target. Inflation has panned out broadly in line with our expectations. However, we remain wary of the last mile disinflation pace as risks persist from (1) geopolitics impacting commodity prices and subsequent price transmission to finished goods; and (2) adverse weather impacting food inflation. We maintain our FY2025 average headline inflation estimate at 4.4% (Exhibit 6).
IIP growth remains steady in April
IIP growth in April was at 5% (March: 5.4%). According to the sectoral classification, manufacturing activity increased 3.9% (March: 5.8%), mining increased 6.7% (1.3%) and electricity production increased 10.2% (8.6%) (Exhibit 7). According to the use-based classification, all categories registered positive growth, except for consumer non-durables (Exhibit 8).
Maintain our call for a shallow rate-cut cycle
The domestic growth-inflation dynamics will support the RBI's focus on guiding inflation toward the 4% target durably. An asynchronous global monetary policy cycle will encourage the RBI to be in a wait-and-watch mode. The Fed has revised down its rate-cut expectations (dot-plot based) to one in CY2024. This would reduce any pressure on the RBI to take cues from the global monetary policy cycle and continue to focus on India's disinflation process. Based on our domestic and global economic conditions expectations, we maintain our call for a shallow rate cut cycle (75-100 bps) from the December policy and stance changing either in October or along with the rate action. |
