Retail inflation likely to be at 5.2% in February: IDFC Bank economist

Retail inflation in Feb: The retail inflation numbers are set to be released on March 12, almost all economists are expecting inflation to be around 5 per cent in February but Gaura Sen Gupta, Chief Economist, IDFC First Bank expects headline inflation at 5.2 per cent in February v/s 5.1 per cent in January.

“We expect a slight uptake in food inflation as we exit the winter months and moderation in vegetable prices reduces. On a year-on-year basis, food price pressures remain elevated in vegetables, pulses and spices. Cereals inflation which has been persistent since mid-FY23, has moderated over the last few months,” Gupta told in an exclusive conversation with Republic Business.

According to Gupta, core inflation (ex. Tobacco) has shown persistent and broad-based moderation in FY24 and is expected to moderate to 3.4 per cent in February 2024 v/s 3.6 per cent in January 2024. Core inflation is inflation that strips out food and energy inflation. “PMI surveys for both the manufacturing and services sectors indicate that upward pressure on output prices remains low with input costs remaining moderate. The February core CPI estimate takes into account the rise in gold import duty,” she added further. 

Headline Inflation

Commenting on headline inflation, she added further, “March 2024 CPI print will get support from an LPG price cut of Rs 100 per cylinder effective from March 9. We estimate it will reduce headline inflation by 0.1 per cent in March 2024.” She went on to add that as per government estimate, rabi food grain output is expected to be lower than last year, reflecting the impact of uneven monsoon. Reservoir levels are 83 per cent of last year and 96 per cent of the average of the last 10 years. This is likely to maintain upward pressure on cereal prices. A counterbalancing factor is adequate food grain stocks with rice stocks at 2.8 times of required levels and wheat stocks at the required levels.
“For the Full year FY24, inflation is expected to average at 5.4 per cent, in line with RBI’s estimate,” Gupta opined. 
 

According to her, headline inflation is expected to moderate to 4.5 per cent, assuming normal monsoon. The key risk to the inflation outlook remains from food inflation which has been volatile in FY24 due to El Nino. In FY25, conditions seem more favourable with chances of La Nina which is supportive for monsoon.  
“For food grains, the area under irrigation is 57 per cent, as a result, weather plays a key role in the food inflation outlook. Core inflation is expected to remain moderate at 4 per cent in FY25 vs. 4.4 per cent in FY24, assuming crude oil prices and global commodity prices remain contained,” she said. 

Is inflation still a worry?
Gaura  believes that the key risk to the inflation outlook is food inflation which is impacted by external factors such as weather changes. That said, we have seen a significant moderation in headline inflation from 7.4 per cent in July 2023 to 5.1 per cent in January 2024, as food inflation eased. The key positive factor is the potential for La Nina conditions post-May 2024 which augurs well for monsoon.

“Another key positive is that household inflation expectations have remained well-anchored despite successive food price shocks in FY24. This is because of effective supply-side management by the government which reduced the duration of such shocks,” she said. 

Encouragingly, core inflation has shown broad-based moderation spread across goods and services. Over time, headline inflation tends to move towards core inflation.
On being asked about inflation paving the way for rate cuts, she said that growth conditions in India and the US have remained on the stronger side. This implies that central banks will not be in a hurry to cut rates with policy space to remain focused on inflation. 

“The latest RBI policy minutes indicated that members wanted more clarity on risks facing the food inflation outlook. This implies that the earliest possible period for the RBI rate cut cycle to start would be June or August. We would assign a higher probability to August, as half the monsoon would be completed by this time.  RBI’s inflation outlook shows headline inflation moving towards the 4 per cent-target from Q2FY25 onwards, averaging 4.4 per cent over Q2 to Q4FY25,” Gupta added. 

She added further that globally, there is uncertainty on when the Fed rate cut cycle will start with the latest US core CPI inflation print higher than expected. “We expect RBI to lag the Fed in terms of when the rate cut cycle starts as well as quantum. The interest rate differentials between India and the US have reduced to a historical low, with more aggressive rate hikes by the Fed,” Chief Economist of IDFC Bank said.