The CPI based inflation for the month of August 2024 was reported at 3.65%, within the RBI’s target range for second month in a row. The CPI inflation during the preceding month was reported at 3.60%. The waning momentum and a positive base effect helped keep the headline inflation in check. Even as there are expectations of improvement in consumption, the core inflation remained well anchored around the 3% handle.
The Consumer Food Price (CFP) inflation for Aug’24 was reported at 5.66% as compared to 5.42% reported in the preceding month. The food inflation lost momentum, on a month-on-month basis it eased by -0.44%. The easing of weather-related vagaries supported the easing of prices of the food basket. While the output of the kharif season would be critical in shaping the price trajectories, equally important would be the supplies of perishables. Even as the concerns have eased the risks of unseasonal rains have not completed abated, a late withdrawal of monsoon still poses a risk for the kharif crop. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 2.72%, -5.31%, 2.66% and 3.89% respectively.
Crude
Brent may remain subdued, most likely in a range of US$70 to US$75 per barrel. In the immediate term this range-bound movement is influenced by two factors. The first is that the premium which was sought to be built into oil prices is gradually waning due to the probability of a full-scale war diminishing in the Middle East. The general expectation is that some kind of truce will be hammered out in the not-so-distant future with the focus mainly on the release of the hostages and a ceasefire in Gaza. The probability is perceived to be high as far as this position is concerned.
A second and a more economical factor is the lack of pick up in Chinese demand for oil due to the still lingering growth concerns. Growth has set in, but it is not supported by strong overall demand which is lacking at this juncture. This is against expectations of China stacking up more oil in reserves to tackle any future impact of rise in oil prices.
Core Inflation
The core inflation (ex. food and fuel) for the month of Aug’24 remained largely unchanged at 3.40%, as compared to the previous month. The core inflation has witnessed an easing trend for more than a year now. The inflationary pressures have remained largely subdued both in manufacturing as well as services-oriented industries. At the current juncture, in a high interest rate environment, the core inflation is not expected to throw any negative surprises over the near term. If the consumption improves on expected lines, the core inflation may gradually move-up over the medium term.
Outlook
Few of the global central banks have embarked on a rate cut cycle and the USA is expected to board the wagon on September 18, 2024. The developed world has initiated the rate cuts partly due to achievement of inflationary targets, and more importantly to support growth and avoid a hard landing.
Indian growth inflation dynamics are slightly different from the developed world. Firstly, the headline inflation numbers have eased and are now within the RBI’s target range, but risks persist that may lead to domestic central bank being on guard against inflationary pressures. Secondly, the growth remains fairly robust and may not require immediate support by way of rate cuts.
At the current juncture we believe, Indian rate cycle would lag the global one. In the recent address by RBI Governor at the conference organised by FICCI and IBA, he mentioned that “The balance between inflation and growth is well-poised.”
