Retail Inflation in India Expected to Fall to 4% in May Due to Lower Food Prices

India’s headline retail inflation is expected to continue its downward trend towards 4%, the midpoint of the Reserve Bank of India’s (RBI) target range, according to economists. This decline is largely attributed to lower food prices, which account for nearly half of the overall consumer price basket.

Inflation in April had already fallen to an 18-month low of 4.7%, from 5.66% in the previous month, due to moderation in food prices. The RBI’s Monetary Policy Committee (MPC) aims to keep inflation within a 2%-6% range, but it is expected to anchor inflation close to the 4% midpoint.

May CPI Inflation is Expected to Track at 4%

Nomura economists, Sonal Varma and Aurodeep Nandi, have postulated that the upcoming consumer price index (CPI) inflation for the month of May is projected to observe an estimated 4%, and the average for Q2 (April-June) is expected to fall short of the Reserve Bank of India‘s (RBI) forecast of 5.1% by a considerable margin of up to 60 basis points. The data regarding inflation for the month of May is expected to be revealed on the 12th of June, with the closest resemblance to retail inflation being in January 2021, where the value recorded was 4.06%.

Lower Food Prices and Proactive Supply-side Intervention to Keep Inflation in Check

Despite the looming menace of a scorching heatwave, the escalation in edibles’ prices is foreseen to be reined in by reduced expenses incurred in agriculture and the assertive interference of the administration on the supply side. The conjunction of the “significant” pedestal effect is expected to supplement the inflation figures for May, which has been estimated at 4.2% by IDFC FIRST Bank.

Barclays’ Inflation Forecast for May and the Foreseeable Future

According to Barclays, although the base impact began to decline in June of this year, it is expected that India’s inflation will decrease to 4.3% in May and remain between 4% and 5% for the foreseeable future. Barclays also predicts that due to the slowdown in inflation, the Reserve Bank of India (RBI) has concluded its interest rate hike cycle and will probably maintain the current interest rate for a longer period of time. This prediction is based on the assumption that the slowdown in inflation will continue for the foreseeable future.

RBI Governor Reassured of Monetary Policy’s Effectiveness

The recent abatement in inflation has provided a sense of relief to the Reserve Bank of India (RBI) as it validates the efficacy of its monetary policy, as stated by Shaktikanta Das, the governor of the central bank. In an effort to subdue the mounting inflationary pressures, the RBI’s Monetary Policy Committee (MPC) has augmented the repo rate by 250 basis points since May of the previous year. The majority of economists anticipate that the MPC will uphold the current rates during its upcoming session.

Conclusion

Overall, economists expect India’s inflation to continue its downward trend, with May CPI inflation tracking around 4% due to lower food prices and proactive supply-side intervention. This moderation in inflation is expected to continue in the near term, with inflation likely to stay between 4% and 5% for the foreseeable future. The effectiveness of the RBI’s monetary policy in quelling inflationary pressures is reassuring, and the MPC is expected to hold rates for the second time when it meets next month.