Headline Inflation Falls, Perceived Risks Still Persist

The CPI based inflation for the month of December 2024 was reported at 5.22%, as compared to the previous month’s number of 5.48%. The seasonal fall in food prices the headline numbers within the RBI’s target range. The core inflation too eased marginally.

The Consumer Food Price (CFP) inflation for Dec’24 was reported at 8.39% as compared to 9.04% reported in the preceding month. The food inflation eased as the rise in prices of vegetables lost some momentum. The month-on-month food inflation saw an easing of 1.48%. Oils and Fats continued to get dearer as international prices witnessed a rise. The slide in INR too may have an impact on the domestic prices. The vegetable supply is expected to remain healthy and upward price pressures from this component are expected to be minimal. The incoming kharif crop too is expected to keep the food inflation at bay on a broader basis. The inflation for Clothing, Fuel & Light, Housing and Miscellaneous was reported at 2.74%, -1.39%, 2.71% and 4.19% respectively.

Crude
The fresh sanctions imposed by US against Russian oil producers and certain vessels led to a spike in crude oil prices to US$ 81 per barrel. These sanctions may lead to Indian and Chinese oil demand scouting for supplies from OPEC and other sources. This development has introduced an upside risk to oil price forecasts. For India, it has the potential to create a double whammy of rising international prices and a weaker INR.


The estimates by OPEC, International Energy Agency (IEA), and the US EIA present a picture of over supply of oil in the coming year, and these expectations have provided a cap to the rise in prices at the current juncture. These estimates differ in the magnitude of oversupply but have a common ground in supply which is in excess of the demand growth.


Core Inflation
The core inflation (ex. food and fuel) for the month of Dec’24 moved marginally lower and was reported at 3.58%, as compared to 3.64% for the preceding month. The core inflation continues to depict a slowdown in domestic consumption. The upside risks to core inflation at the current juncture are emanating not from the demand side but from the rise in input costs. The RBI in its last policy statement indicated that, “Businesses expect pressures from input costs to remain elevated and growth in selling prices to accelerate from Q4.”


Outlook
The CPI inflation reading was mostly in line with expectations, as food basket was seen tracking downwards. The expectations of inflation easing and the change of guard at RBI had raised the expectations of the markets with regard to a rate cut in February 2025. The developments since the last policy of weakening INR, strong leading growth indicators from US and the resultant rise in US market yields have moderated the expectations of market participants of domestic rate cut cycle initiating from the Feb’25 RBI policy.


The risks that have materialised in the recent past were largely anticipated and thus, we do not expect a major change in the projected trajectory. The CPI based inflation trajectory is expected to be in line with the one highlighted by RBI in its last policy. The effort to smoothen the slide of INR may be a critical factor influencing a status quo policy.