Retail inflation eased to a one-year low of 4.75 per cent in May as prices of some kitchen staples declined marginally, according to government data released on Wednesday. The Consumer Price Index (CPI) based retail inflation was 4.83 per cent in April 2024 and 4.31 per cent in May 2023. Experts felt that if food inflation continues to moderate, there is a possibility of an interest rate cut during the second half of the current fiscal.

However, there was no encouraging news on the industrial growth front as it moderated to three-month low of 5 per cent in April against 5.4 per cent of April mainly on account of somber performance of the manufacturing sector.

Data released by the Statistics Ministry on Wednesday showed that vegetable inflation dropped a tad but cereal and pulses inflation rose which balanced the equation. On a sequential basis, food inflation rose by 0.73 per cent month-on-month in May versus 0.74 per cent in April. Food contributed 3.4 percentage points (ppt) to the headline inflation.

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Meanwhile, core inflation (headline inflation minus inflation of food and fuel) eased to 3 per cent in May from 3.2 per cent in April led by a broad-based moderation across categories. Moreover, on a sequential basis, core inflation eased to 0.26 per cent month-on-month in May from 0.47 per cent in the previous month.

Food inflation

According to Swati Arora, Economist with HDFC Bank, moderation in CPI was led by a slowdown in core inflation and a decline in fuel inflation. Food inflation continued to remain elevated in line with seasonal trends. Food inflation is expected to remain high in June as well. According to the mandi prices, vegetable prices (potato, tomato and onion) are up by 5.2 per cent on a sequential basis in June till date.

“Core inflation is expected to bottom out and start rising from Q2 FY25. Core CPI is expected to rise above 4 per cent August/September onwards amid lower base from last year,” she said.

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Rajani Sinha, Chief Economist with CARE, said high inflation in the food basket, especially in specific food categories, including vegetables and pulses, remains a concern. While the outlook for food inflation has brightened due to anticipation of a normal monsoon, the spatio-temporal distribution of monsoon would be a critical factor to monitor. Government initiatives on the supply side, such as the Open Market Sale Scheme (OMSS) and export restrictions, will further aid in keeping food prices under check.

“Aside from the higher food inflation, there is an incremental risk to inflation from the increase in global commodity prices, particularly industrial metals,” she said. Talking about the outlook, she said that a favourable base effect is expected to persist until July 2024, helping absorb potential upward risks to price pressures to a certain extent. “For FY25, we expect inflation to average 4.8 per cent. If food inflation moderates, we expect the RBI to cut the policy interest rate by a shallow 50 bps in two tranches in the second half of the fiscal year,” she said.

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