Cautious optimism

The easing of the Consumer Price Index (CPI)-based inflation to 4.85 per cent in March, lowest since May last year, presents an opportunity for cautious optimism among Indian policymakers and economic analysts. With the National Statistical Office (NSO) affirming a slight deceleration in food prices and other favourable economic indicators, there's an emerging consensus that inflation might remain under control. However, the path ahead is not devoid of uncertainties and potential setbacks.

The softening of inflation from February's 5.09 per cent is indeed a positive sign, especially when compared to the 5.66 per cent of March 2023. This moderation is attributed primarily to a decrease in food prices, which have been a significant driver of overall headline inflation lately. Yet, despite the slight moderation, food inflation at 8.52 per cent remains concerningly high. The average food inflation for FY 2023-2024 stood at 8 per cent, and for January-March quarter, it was 8.5 per cent. This goes on to show how persistent the threat of food inflation has been.

It may be noted that the ongoing interventions by the government, including the Open Market Sale Scheme (OMSS) and restrictions on exports, have certainly played their role in tempering food prices. Also, the introduction of fuel price cuts ahead of the national elections has helped ease overall inflationary pressures, further assisted by a worldwide downturn in crude oil prices earlier in the year. Moreover, the outlook for the agricultural sector appears promising with increased rabi sowing and expectations of a normal monsoon, potentially easing price pressures from the supply side.

However, as global economic conditions fluctuate and domestic issues such as the potential impact of an intense summer loom large, these gains are not guaranteed to hold. Some of the factors listed above are incumbent upon the degree of volatility on the external front—something that cannot be taken for granted under present geopolitical circumstances.

It may be recalled that the core inflation, excluding food and fuel, remains within manageable limits, suggesting that transient factors predominantly drive high inflation. At 3.5 per cent, it has been below 4 per cent for fourth straight month. Against such a backdrop, it will be crucial for the central bank to lay extra emphasis on offsetting inflationary gains made on account of transient factors like food and fuel.

A critical factor in the near-term trajectory of inflation will be the monsoon season. Normal to above-normal rainfall could alleviate some of the current price pressures on the agricultural sector, thereby further moderating food inflation. Conversely, a deficient monsoon could exacerbate these pressures. It may be appropriate to note here that inflation in rural areas is comparatively higher than in the urban areas.

Considering the expectation of an average CPI inflation of 4.5 per cent this year, with projections for first quarter standing at 4.9 per cent, there is very little chance of the RBI going for a rate cut in next meeting. The RBI's decision to maintain a steady policy stance until there is more clarity is prudent given the mixed signals regarding inflation and economic growth.