Retail inflation stays above RBI's target for 52nd straight month at 5.10%

Retail inflation dipped to a three-month low of 5.10 per cent in January 2024, down from 5.69 per cent in December, primarily attributed to a decline in food inflation, which dropped to 7.58 per cent. However, prices of intoxicants, clothing, and footwear also saw marginal declines, registering at 3.28 per cent and 3.37 per cent, respectively.

Despite the decrease in headline retail inflation, it remains noteworthy that inflation has now sustained 52 consecutive months above the Reserve Bank of India's (RBI) medium-term target of 4 per cent. On a positive note, inflation has consistently stayed within the tolerance range of 2 per cent-6 per cent for the fifth consecutive month, SBI Research said in a note.

At the national level, while Consumer Price Index (CPI) inflation decreased by 270 basis points (bps) to 5.10 per cent in January 2024 compared to April 2022, the weighted contribution of core CPI also declined by 170 bps during the same period. A major portion of this decline, about 77 per cent, can be attributed to three segments: transportation & communication, clothing and footwear, and household goods, the research arm of the country’s largest bank said.

However, analysing the item-wise decline in the weighted contribution of core CPI presents a nuanced picture. The decline in core inflation is visible in both rural and urban areas and in essential goods and services, challenging the notion that it solely reflects a decline in demand or rural slowdown.

For instance, the decline in weighted contribution in clothing and footwear/household goods & services is attributed to items such as saree, shirt, trouser, clothing material, washing soap, bedsheet, etc. The phenomenon suggests a shift in purchasing behaviour towards online platforms, potentially indicating enduring core inflation decline, SBI Research noted.

CPI inflation is expected to hover slightly above 5.0 per cent in the remaining two months of FY24, averaging at 5.4 per cent for the fiscal year. Subsequently, inflation is expected to decline until July 2024 (reaching close to 3 per cent) but rise thereafter to peak at 5.4 per cent in September 2024 before decelerating. For FY25, CPI inflation is projected to average at 4.6 per cent, SBI Research said.

In the cereals subcomponent, rice stands out with the highest price build-up, with an anticipated sharp decline in rice production for FY24 to 1063 lakh tonnes, as per the 1st advanced estimate.

However, based on alternate scenarios, the SBI's Artificial Neural Network (ANN) model suggests that there is no compelling reason for the RBI to cut rates from the current 6.5 per cent. The SBI maintains its stance that the first rate cut will likely occur by second quarter of next fiscal, SBI Research added.