India: Inflation hits one-year low in May
Inflation eased to 4.7% in May, cooling slightly from April’s 4.8% and below market expectations. May’s result represented the weakest inflation rate in a year. Looking at the details of the release, price pressures slowed for housing plus clothing and footwear. Meanwhile, food inflation was steady at April’s level in May and remained above headline inflation for the 11th straight month.
The trend was unchanged, with annual average inflation coming in at April’s 5.4% in May.
Finally, consumer prices rose 0.48% in May over the previous month, mirroring April’s reading.
Our panelists expect inflation to gradually come down ahead, largely on the Central Bank’s past hikes to interest rates. That said, inflation will remain above the midpoint of the Central Bank’s 2.0–6.0% target range through the end of our forecast horizon in 2028. Strong food pressures are expected to continue stoking prices ahead. Moreover, domestic demand remains robust, heating up services inflation. The main upside risk is adverse weather damaging crops and thus raising food prices further.
Aurodeep Nandi and Sonal Varma, economists at Nomura, commented:
“So far, high frequency data suggest headline inflation is likely to trend lower to ~4.3% y-o-y in June from 4.7% in May, partly reflecting a favourable base […]. Beyond June, favourable base effects will lower headline inflation (to sub-4%) in July-August, before rebounding higher from September onwards. Monsoon rains and input costs will be important drivers of inflation going forward. On average, we expect headline inflation to moderate from 4.8% y-o-y in Q2, to 3.9% in Q3 and then rise to 4.6% in Q4.”
On the monetary policy outlook, HSBC’s Pranjul Bhandari and Maitreyi Das said:
“Food prices hold the key for RBI action. If rains over June and July are strong, reservoirs fill back up, and sowing activity rises quickly, food inflation could fall over a 5-month horizon, opening up space for a shallow rate cut cycle. So far, rains started off well in June, but have slowed in recent days. We are watching this space carefully. If rains rise back up to normal/above-normal levels, the RBI could cut the policy repo rate as early as August.”