India’s March retail inflation eases below RBI’s upper tolerance level

(Reuters) – India’s annual retail inflation for March eased below the central bank’s upper tolerance level for the first time this year, as food prices softened.

Annual retail inflation eased to 5.66% in March from 6.44% in the previous month, government data showed on Wednesday. The Reserve Bank of India targets a range of 2%-6%.

A Reuters poll of 39 economists had forecast an annual inflation rate of 5.80% in March.

The March consumer price index (CPI) inflation came a week after the RBI’s Monetary Policy Committee (MPC) maintained a surprise status quo on interest rates. However, Governor Shaktikanta Das said that “it is a pause, not a pivot”.

COMMENTARY:

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

“India’s March CPI came exactly in line with our expectation of 5.66% Y/Y, aided by slowing food prices and easing core inflation. In fact, CPI ex-food dropped to 6.2%, a thirteen-month low. While spice prices continue to drive food inflation, milk and products too remain elevated.”

    “On the positive side, cereal prices, which has been the biggest contributor to food inflation for quite some time now, has recorded its first month-on-month contraction in twenty-one months, although the elevated prices mean Y/Y inflation still remains high and at double digits.” 

    “Within core inflation, goods prices still remain quite elevated, albeit inflation is showing a declining trend. Also, coupled with declining service inflation, core inflation dropped to 6.15 Y/Y, a 10-month low, much to the relief of the RBI.

    “With the RBI opting for a pause in April, exactly in line with our expectation, we now continue to believe that the central bank has come to the end of its rate hike cycle and expect it to effect its first policy rate cut in 4Q23 to support the flagging economy.”

VIVEK KUMAR, ECONOMIST, QUANTECO RESEARCH, MUMBAI

“CPI inflation decelerated to a 15-month low as price pressures moderated on the food, fuel, and core fronts. What comes as a big relief is the sequential drop in the price of cereals, which is reflective of open market sales by the FCI in a bid to cool wheat prices. Spices too have lost considerable momentum in the last two months. The preliminary forecast of a ‘normal’ monsoon by the IMD for June-September offers comfort.”

“Having said so, any extrapolation of comfort on food inflation would be difficult as El Nino risks continue to lurk on the horizon, while cereals could require continued administrative intervention. Besides, milk is showing a build-up of price pressure on lagged impact of elevated input prices.

“Having said so, the moderation in core inflation forms the silver lining. Going forward, core inflation is expected to grind lower at a slow pace on the anticipated slowdown in domestic growth momentum and the lag impact of monetary tightening.

    “The incoming prints in the near term will capture these dynamics along with a favorable statistical base effect that will help pull headline inflation lower.

SREEJITH BALASUBRAMANIAN, ECONOMIST, IDFC AMC, MUMBAI

    “India’s March CPI of 5.7% year-over-year was in line with our expectation, reflecting mild positive momentum in the food and beverages category and lower momentum (vs. February) in core inflation. Within food, sequential price growth of fruits, milk, vegetables (reversal after seasonal winter disinflation) and pulses picked up while that of cereals (FCI recently offloaded some of its wheat stock), eggs and vegetable oils eased.” 

    “Core inflation moderated mildly to 5.8% Y/Y in March, with core-goods inflation averaging 7.1% and services-ex-housing inflation averaging 5.9% during April-February.”

“Going ahead, April real-time price momentum in food items appear mixed but the base effect will turn favourable and, structurally, the impact of global and domestic growth dynamics will be crucial in FY24.”

DEVENDRA PANT, CHIEF ECONOMIST, INDIA RATINGS, MUMBAI

“The decline in March inflation was on expected lines and was due to a strong base effect, which will be even stronger in April 2023. The good part of th e inflation number is the reversal of an increasing trend of nine months of rising cereals and products inflation. It appears that government interventions have helped in arresting the increasing inflation of cereals and products. However, the impact of unseasonal rains and the likely impact of monsoons may give some temporary shocks to inflation.

“Inflation in the near term is likely to be lower than 6% due to the base effect. This will give some solace to monetary authorities. We, therefore, believe that the growth-inflation dynamics at the current juncture do not warrant further rate hikes at present. However, the RBI will continue to monitor inflationary trends and should a situation arise, it may take necessary action.”

SAUGATA BHATTACHARYA, EXECUTIVE VP AND CHIEF ECONOMIST, AXIS BANK, MUMBAI

“The March CPI inflation printed at 5.66%, close to the markets’ median of 5.8%. Core inflation was 5.95%, led by a drop in transport as well as clothing and footwear. This is likely to keep the MPC on pause even at the next review meeting in June, given that disinflation is likely to continue on the forecast glide path. A key data point to watch will be the US CPI due later evening today”

RADHIKA RAO, SENIOR ECONOMIST AND EXECUTIVE DIRECTOR, DBS BANK, SINGAPORE

“March CPI inflation eased in line with our forecast to a three-month low, validating the central bank’s pause last week. The headline print is likely to average sub-5% this quarter on base effects, convincing the MPC to leave rates unchanged at the next review.

“Food inflation also eased in year-on-year terms but picked up on a month-on-month basis, owing to the impact of unseasonal rains and firm protein, while administrative measures helped to soften cereals prices. Imported pressures, however, continued to moderate as global oil/ commodity prices retreated. Excluding the volatile segments, core inflation moderated to a six-month low, below 6% yoy.”

MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL, MUMBAI

“The easing of headline and core inflation in near-expected lines, while positive, is still implying inflation average has overshot RBI’s Q4 estimate.

“Inflation trends ahead should ease and we see headline inflation averaging 5.3% in FY24 and core undershooting headline to average around 5.1%. Factors like better rabi output and easing cost conditions would be countered by weather-related vagaries, milkflation, higher global financial market volatility and ongoing pass-through of input prices to output prices, impacting core services inflation.”

SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, GURUGRAM

“The base effect worked its charm and pulled down headline retail inflation in March as expected. It was encouraging to see that apart from food inflation, core inflation also dropped in the month below 6%.

“This print aligns with RBI’s recent policy pause and the central bank is expected to stay on hold for the rest of the year.

“Inflation is likely to trend lower in the coming quarter as the impact of a high base effect lingers on. The recent projection by IMD of a normal monsoon bodes well for the inflation trajectory. However, the impact of heat waves and any disruption in the progress of monsoon due to El Nino could upset the disinflation trend and remains a risk.”

GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

“Retail inflation came in at 5.66%, nearly in line with our expectations of 5.7% YoY and vs 6.44% YoY in Feb 23, as housing inflation subdued and core price increase moderated sequentially. For FY24, expect the base effect to play its part in allowing CPI inflation to cool towards an average of 5.2-5.5%.

“Even as Governor Shaktikanta Das asserted that the April 2023 policy pause should not be viewed as a pivot, we believe the bar for future rate hikes has been raised, especially since near-term prints of CPI will be sub-6%.

“Unless CPI inflation rises above 6% on a sustainable basis, we expect the MPC to maintain a prolonged pause hereafter and assess the lag impact of previous rate hikes amid global macro uncertainty and the tail end of the global rate hike cycle.”

UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

“The March inflation figures have moderated broadly in line with expectations. Much of the softness was expected on account of the base effect along with moderation in prices of cereals and core inflation. While favourable base effects should continue to ease the headline inflation in the quarter ahead, we remain wary of food inflation in the months ahead given weather adversities. However, the RBI is expected to remain on an extended pause evaluating the impact of the past rate hikes.”

(Reporting by Rama Venkat, Nishit Navin, Navamya Ganesh Acharya, Ashish Chandra, Nandan Mandayam, Anuran Sadhu and Meenakshi Maidas in Bengaluru; Editing by Savio D’Souza and Janane Venkatraman)