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Published: August 13, 2024
Updated: August 13, 2024

CPI Inflation Hits 5-Year Low, but SBI Warns of Bumpy Road Ahead

Inflation Falls to 3.54% in July

India's retail inflation rate fell to a 5-year low of 3.54% in July, down from 5.08% in June and 7.44% in July last year. However, the State Bank of India (SBI) has cautioned that the uneven monsoon distribution may lead to crop losses and impact food prices.

Uneven Monsoon Distribution a Concern

SBI's Ecowrap report notes that major food grain-producing states have received deficient rainfall, which could result in crop losses and higher food prices. La Nina's presence may lead to excess rainfall in August and September, further impacting crops.

Inflation to Remain Elevated

SBI predicts that inflation will remain above the Reserve Bank of India's (RBI) forecast of 4.5% in FY25. Domestic growth momentum is strong, but geopolitical uncertainty and tight liquidity to control inflation may impact growth dynamics.

Rate Cut Expectations

SBI expects a rate cut in December 2024 or February 2025, given the current circumstances. The report also notes that rate hike cycles across central banks are synchronized, but rate cut cycles become unsynchronized.

Food Price Inflation Remains a Concern

Consumer food price inflation was 5.42% in July, with pulses, cereals, and vegetables experiencing high inflation rates. Analysts attribute the lower inflation to a higher base effect and expect price pressures to continue until the new crop arrives.

While CPI inflation has hit a 5-year low, SBI's warning about the uneven monsoon distribution and its potential impact on food prices suggests a bumpy road ahead. Inflation is expected to remain elevated, and rate cut expectations have been pushed to later in the year.