In August, India's headline consumer price index (CPI) recorded an impressive annual increase of just 3.65%, marking the second consecutive month in which the inflation rate has fallen within the Reserve Bank of India's (RBI) target range. This information comes from the National Statistical Office (NSO), underscoring a positive shift in inflation dynamics.
The RBI has established a long-term inflation target of 4%, with an acceptable fluctuation range of plus or minus 2%. The moderation in the overall CPI this August can largely be attributed to easing inflation rates in food prices. Although food prices are still on the rise, the NSO highlighted that August's food inflation figure represents the second-lowest rate recorded since June 2023, with a year-on-year inflation rate based on the All India Consumer Food Price Index (CFPI) standing at 5.66%.
Additionally, other consumer expenses have exhibited signs of moderating inflationary pressure in August. Apparel, for example, saw an annual increase of 2.72%, while the housing sector recorded a slight uptick of 2.66%. In a notable development, the consumer fuel and light bills experienced deflation, decreasing by 5.31% year-on-year in August.
The current moderating inflation landscape in India may prompt the RBI to contemplate lowering interest rates towards the end of 2024, according to insights provided by HSBC Global Research in a recent letter to clients. Similar to many other countries, India faced elevated inflation rates during and following the pandemic, with the CPI reaching a peak gain of 7.79% in April 2022.
In response to these skyrocketing inflation levels, the RBI raised its key policy interest rate from a historic low of 4% in mid-2022 to a sustained 6.50% by February 2023. However, the trend of moderating inflation might lead the central bank to consider a rate cut during its upcoming December meeting, as indicated by HSMC.
Experts from HSBC further clarified, "We do not anticipate a rate cut or stance change in the October meeting; however, both outcomes could be plausible in December." Lower food prices in India, primarily arising from a fruitful monsoon season, along with reduced global energy costs, are expected to influence the RBI's decision-making process.
"Given our projections of declining food prices and subdued energy inflation, headline inflation could potentially drop by December," added HSBC. This evolving narrative of inflation in India not only reflects the resilience of the economy but also raises critical questions about monetary policy shifts that could affect various sectors across the nation.
Investors, consumers, and policy-makers alike will be closely monitoring these developments as they unfold, with the potential for profound implications on India's financial landscape..