India rates: Steady inflation unlikely to deter cautious RBI policy committee
April-May inflation below RBI’s 4.9% estimate.
Group Research - Econs, Radhika Rao13 Jun 2024
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May CPI inflation missed forecasts by a whisker at 4.75% yoy (DBSf 4.8%) largely unchanged from 4.83% in April. Core (ex-food, fuel) continued to slip to new lows at 3.1% yoy vs 3.2% in Apr. The underlying make-up of the drivers has been similar for the past half year, where higher food has been offset by disinflationary pressures in non-food component. Food stayed firmed at 7.9% yoy in May on a modest uptick amongst perishables, though an adverse impact from the heatwaves in Apr-May did not materialise. Recent cuts in fuel products pushed the related segment in red, along with sequential cooling off in gold prices, capping non-food pressures. Inflation averaged 4.8% in Apr-May, slightly below the RBI’s 4.9% estimate.

High-frequency data suggests headline CPI inflation should trend towards 4.3-4.4% in June, also influenced by base effects. Gains in industrial metals are yet to pose an upward pressure on input costs. 2QFY (Jul-Sep) inflation is on course to slip below 4% on a higher base. Considering the choppy and uncertain nature of food prices, the RBI MPC indicated at the June rate review that it will take a forward-looking view, opting to see through near-term disinflation and base-effect driven pullback, instead focusing on the impact of weather-related fallout on food costs. We retain our view for rates to stay on hold for rest of this year, with domestic considerations also getting a hand from the cautious Fed’s dotplot (see other sections in today’s note). Notably, the term of the external members of the policy committee is also due to end towards the end of the next quarter, which might change the voting mix.

On the markets, bonds had sold-off across the curve on the unexpected election results, but have since stabilised, with the 10Y back above 7%. July’s budget is next in view, especially the likelihood of a narrower borrowing program. Rupee found it difficult to sidestep the uptick in the dollar this week, with the USDINR squeezed up to a fresh high. We expect that bias to continue, especially if US data remains mixed, defying expectations for a clear softer run.

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]

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