A SOFTER LANDING

Inflation edges lower as food prices ease. Clarity over monsoon and oil prices will determine MPC pivot

DATA RELEASED BY the National Statistical Office on Friday showed that retail inflation, as measured by the consumer price index, eased to 4.85 per cent in March, down from 5.09 per cent in February. The decline was driven by a marginal softening of food prices. Despite that, food inflation remains elevated — the consumer food price index stood at 8.52 per cent in March. Core inflation, which excludes food and fuel, held steady at 3.5 per cent as per ICRA’S assessment. This decline in the headline inflation in March alone is, however, unlikely to alter the stance of the monetary policy committee.

The disaggregated data shows that inflation remains elevated in cereals (8.37 per cent), eggs (10.33 per cent), vegetables (28.34 per cent) and pulses (17.71 per cent). Elevated inflation in dal, sabzi and roti before voting commences in national elections is not good news. However, rains this year could be better. The US National Oceanic and Atmospheric Administration (NOAA) is expecting La Nina conditions to develop, as per a note by Crisil. This is normally associated with good rainfall, which should bode well for food production and, as a consequence, prices. On the other hand, in the non-food category, inflation remained subdued in most items such as household goods and services, clothing and footwear, recreation and amusement, with the exception of personal care and effects.

In his comments on the global economic scenario, RBI Governor Shaktikanta Das noted that “the last mile of disinflation is turning out to be challenging.” In the US, inflation edged upwards in March. Coupled with a stronger than expected growth momentum, this has led to many scaling back their expectations of both the timing and the number of rate cuts by the US Fed. On Thursday, the European Central Bank also held rates, though it signaled its willingness to cut rates soon, if there was “confidence that inflation is converging to the target in a sustained manner”. In its last meeting, the MPC had voted to maintain the status quo in order to ensure that policy continues to be “actively disinflationary”. The real interest rate is now at levels that some members of the committee consider as “excessive”. However, any change in policy is only likely to occur when there is clarity over the monsoon, the trajectory of food inflation, and the path of crude oil prices. These could influence when and how the MPC pivots.