Indian Inflation Expected to Stay Below RBI Target in August 2024

In August 2024, Indian consumer inflation is anticipated to remain below the Reserve Bank of India's (RBI) medium-term target of 4.0% for the second consecutive month, according to a recent survey of economists. This projection is primarily attributed to a moderation in food price increases, benefiting from a high base effect established in the previous year.

A poll conducted by Reuters, involving 53 economists, forecasts the consumer price inflation at 3.50% for August 2024, compared to the year prior. This figure represents a slight change from July's five-year low of 3.54%. The predictions for the upcoming data, scheduled for release on September 12, 2024, range from 3.10% to 4.91%.

Kanika Pasricha, chief economic advisor at Union Bank of India, commented on the situation:

"A high base effect likely continues to play cupid... On-the-ground food prices have seen a salutary effect from a recovery in the monsoon in recent weeks... even as key agricultural states are still reeling under deficit. We expect the base effect to erode from September onwards. Risks to food inflation from weather-related issues such as sharply higher than required rains in September need a close watch."

The RBI, established on April 1, 1935, has been utilizing a flexible inflation targeting framework since 2016. Food items, accounting for approximately 45.86% of India's Consumer Price Index (CPI) basket, have seen a significant easing in price rises over the past two months. Official data from July showed vegetable price increases had slowed to 6.83% year-on-year, a substantial drop from the nearly 30% increases observed in each month during the first half of the year.

However, economists caution that this moderation might be temporary. Erratic monsoon rains across India could potentially harm crop yields and drive prices higher in the coming months. This is particularly concerning given that India's agriculture sector employs about 42% of the country's workforce.

The recent weakening of the Indian rupee, which became a free-floating currency in 1993, is expected to keep inflation elevated in the near term. A separate Reuters poll projected inflation to average 4.2% in the current quarter, with increases to 4.5%-4.7% anticipated in subsequent quarters, surpassing the central bank's 4% target.

These projections suggest that the RBI, whose Monetary Policy Committee conducts bi-monthly reviews, may proceed cautiously with monetary policy easing. Most economists forecast the first rate cut to occur in December 2024.

Dhiraj Nim, an economist at ANZ, provided insight on the potential RBI response:

"It is likely CPI inflation will undershoot the RBI's 4.4% projection for Q3 2024, posing downside risks to their full-year forecast as well. The RBI will view this favourably and is likely to warm up to rate cuts by December."

Core inflation, which excludes volatile items such as food and energy, is predicted to be 3.30% in August, based on the median estimate from a smaller sample of 15 economists. It's worth noting that the Indian statistics agency does not publish core inflation data.

The survey also indicated that the Wholesale Price Index-based inflation, first published in 1942, is expected to ease to an annual 1.85% in August, down from 2.04% in July.

As India, the world's fifth-largest economy by nominal GDP and second-largest producer of fruits and vegetables, navigates these economic challenges, the coming months will be crucial in determining the trajectory of inflation and the RBI's policy responses.