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Rising Inflation: Base Effects Fade, But Relief Could Be on the Horizon

Published 07-10-2024, 05:57 pm
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Headline inflation in India is poised to move back above 4% after a brief respite, largely due to the diminishing base effects that had kept it below this level for the past three months. The latest data suggests inflation could hit 5.1%, with the average for Q3 2024 coming in at around 4.1%, still lower than the 4.9% recorded in the previous quarter.

Despite this uptick, a sharp decline in vegetable prices and falling oil prices over the next couple of months could help stabilize inflation in the medium term. Overall, the headline Consumer Price Index (CPI) is projected to average 4.2% year-on-year for FY25.

However, rising food prices are adding some noise to the inflation picture, particularly in the case of vegetables. Prices of onions, potatoes, garlic, and peas have surged, and the cost of cooking oil has also increased due to custom duty hikes on palm oil. Yet, other key food categories, including rice, pulses, and dairy, are seeing prices moderate.

The bumper rice crop, in particular, has led to a significant drop in global rice prices, offering some relief. India’s first estimates of kharif (summer) food production, due in the coming weeks, are expected to confirm a strong harvest, suggesting a potential surplus that could further ease food inflation pressures.

A key factor that could help keep inflation in check is the recent decline in crude oil prices. With oil prices staying below USD 80 per barrel, the risk of fuel-driven inflation remains low. Retail fuel price reductions could also be on the horizon as oil companies enjoy increased marketing margins. Even with a potential hike in electricity tariffs by 7.5%, fuel and light inflation are expected to remain subdued in FY24-25.

Core CPI, which excludes food and fuel, remains below 4%, indicating economic slack. While there has been a slight rise in core inflation, driven in part by higher telecom and gold prices, it is expected to stay low for the foreseeable future. This weakness is further reflected in sectors like automotive and FMCG, where rising input costs haven’t translated into higher prices, signaling a lack of pricing power across the board.

While headline inflation is ticking up, several key factors—including falling oil prices and strong food production—suggest that inflationary pressures may be contained in the months ahead.

Read More: How Investors Captured a 55% Rally in a Year

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