In May 2024, India’s Consumer Price Index (CPI) inflation eased to 4.75% YoY from 4.83% YoY in the previous month. Core inflation, which excludes food and fuel, fell to a series low of 3.12% YoY from 3.25% YoY in April 2024. Fuel inflation remained in deflation at -3.83% YoY on account of the reduction in LPG prices in March 2024.

Food inflation, however, remained elevated at 7.9% YoY. Vegetables, cereals, and pulses remained the major drivers of inflation. Together, they account for 18% of the weight in the CPI basket but contributed a significant 57% to headline inflation in May 2024. Food inflation also remained broad-based, with 46% of items in the food basket witnessing inflation rates surpassing 6%.

A steady correction in the refined measures of core inflation, which exclude transportation fuel and valuables like gold, reflects continued moderation in underlying inflationary pressures. However, household inflation expectations for the three-month and one-year ahead periods rose in RBI’s May 2024 survey round, despite corrections in LPG and pump prices, due to elevated food inflation.

We anticipate inflation to average around 4.0-4.3% YoY in FY25. While food prices may contribute to volatility in headline inflation, subdued consumption is expected to keep core inflation benign. RBI might consider shifting the policy stance to ‘neutral’ in the August 2024 MPC meeting as a normal or above-normal monsoon is expected to ease food inflation. Adopting a neutral policy stance will allow the RBI to respond swiftly with a rate cut if warranted by the data.

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