Key takeaway: CPI inflation came in a tad below our expectations even as food prices rose amid inclement weather. The moderation in base metals as also crude oil prices in the past month may somewhat balance the expected increase in food prices in the upcoming months, since this may allow the government the space to cut pump fuel prices. Although the continued moderation in core inflation along with forecasts of normal monsoon remains a key positive, the delayed rate cut cycle in the US with the RBI's vigil on food inflation may push the rate cycle in India to Q4FY25. We expect the MPC to cut rate by 25bps in Q4FY25E.
Core CPI falls to lowest on record; headline lowest in 12 months
May-24 headline inflation came in at 4.75% YoY versus 4.83% in Apr-24, the lowest in 12 months. MoM, the headline CPI grew by 0.48%, same as in April. Vegetable prices rose 3.2% MoM in May versus 1.3% in April 2024, pushing food and beverages index up by 0.68% MoM, at the fastest pace since Nov-23. Spices inflation continued to be a drag for the sixth straight month, while the fuel and light component inched up by 0.8% after three consecutive months of a drop. The food basket that can potentially dislodge household inflation expectations - comprising vegetables, pulses, spices, oils and fats - rose by ~1% MoM in May versus 0.77% average decline in Jan-April 2024.
Core CPI continued its downward trajectory, with May-24 print at 3.12% YoY - the lowest on record. The sequential MoM print was at 0.22% versus six-month average of 0.25%. Personal care and effects inflation rose by 0.91% MoM versus an average rise of 0.5% every May since the record began.
We retain FY25E CPI at 4.5% and first rate cut in Q4FY25
Despite easing inflation trajectory, the headline print remains above 4%, with past three months' headline CPI averaging 4.8% YoY. When seen in conjunction with consistent YoY food and beverages inflation (averaging 7.83% in the past three months versus 8% in the Dec-23 to Feb-24 period]), there remains a lingering threat that inflation may turn sticky as inclement weather conditions prevail. Monsoons may offer comfort but concerns over its spatial distribution and predictability also loom.
Food inflation remains the primary risk to inflation outlook in FY25. Upside risks to food inflation can un-anchor inflation expectations and arrest the downtrend in headline CPI at current levels. Supplementing risks from food inflation due to weather conditions, geopolitical uncertainties, and slower moderation in freight costs also may keep supply-side risks alive in the upcoming quarters.
In this context, we expect the transition to 'rate cut' cycle to be slow, with a change in stance in Q3FY25 and the first rate cut in Q4, as the MPC maintains an unwavering focus on durably maintaining 4% inflation target. Among tailwinds, lower crude prices if translated to retail pump prices, with equally and normally distributed monsoon, may moderate H2 inflation, in which case, there exists a possibility to advance first cut to Q3. |
