‘More clarity on the path of disinflation could push this decision at least to June 2024, if not later’
Slowing inflation, a smaller fiscal deficit and an imminent turn in the US Federal Reserve’s policy rates, will create the ground for the Monetary Policy Committee (MPC) to start cutting rates, according to a report by Crisil Market Intelligence & Analytics (MI&A).
However, Crisil’s MI&A economic research team believes more clarity on the path of disinflation could push this decision at least to June 2024, if not later.
“While CPI inflation has remained in the Reserve Bank of India’s (RBI) tolerance band of 2-6 per cent since August, it is still shy of the 4 per cent target and that keeps the MPC on watch,” opined the team lead by Dharmakirti Joshi, Chief Economist, Crisil.
Inflation based on the Consumer Price Index (CPI) eased to a three-month low of 5.1 per cent in January from 5.7 per cent in December, largely driven by lower food prices. However, a further drop in core inflation to 3.5 per cent – a 50-month low – stole the limelight.
Crisil’s econimists noted that the steep and broad-based disinflation in core inflation is both comforting and intriguing. Inflation in clothing and footwear is at 38-month low, housing at 35-month low, household goods and services at 33-month low, health at 41-month low, recreation and entertainment at an all-time low, and personal care and effects at 23-month low.
The economists observed that though low input costs have contributed, the role of softer demand in keeping core inflation benign cannot be ruled out.
“We expect CPI inflation to average 4.5 per cent in fiscal 2025 versus an estimated 5.5 per cent this fiscal. Cooling domestic demand, assumption of a normal monsoon, along with a high base for food inflation, should help moderate inflation next fiscal.
“A non-inflationary Budget that focusses on asset-creation rather than direct cash support also bodes well for core inflation,” said the report.
However, an unusual weather event, if at all, could reverse the easing. Similarly, recent developments in the Red Sea and a fading low base effect for commodity prices could put some upside pressure on core inflation and would need monitoring.
Domestic demand
Crisil’s economists assessed that domestic demand may moderate next year, driven by delayed impact of the RBI’s rate hikes and regulatory measures to clamp down credit growth.
Investment – the primary driver of growth this fiscal – may see lower support from the Central government’s capital expenditure (capex) next year as envisaged in the interim Budget, they added.
“Exports face renewed risks from global trade disruptions, emanating from continuing unrest in the Middle East. “Global demand, too, is expected to slow as the US growth slows, with progressing transmission of past rate hikes by the Federal Reserve,” per the report.
The economists expect slowing growth in manufacturing and services to lead to gross domestic product (GDP) growth of 6.4 per cent, on average, next fiscal compared with current print of 7.3 per cent.
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