CPI inflation edged higher to 4.81% from May’s 4.31%, front led by food and beverages with usual suspects of vegetables, pulses and meat/fish prices exhibiting largest increase while cereals, spices and milk CPI remained at elevated levels.
On positive cues, Core CPI though declined marginally to 5.12% in June from 5.21% in May, and remains below the one-year average of 5.8%.
Though, retail inflation remains within the tolerance range of the RBI for the fourth consecutive month (and should remain so for the rest of the fiscal), continued vigil on the evolving inflation outlook is warranted given the erratic progress of monsoon and its impact on Kharif sowing and subsequently on pulse inflation.
Analysing volatility in vegetable prices, Tomato, Onion and Potato (TOP) form the staples in Indian kitchen and their price variation is the chief cause of volatility in the vegetable/ food inflation. The research desk believes if tomato prices increase without any substantial change in potato & onion then average inflation in Q2 FY24 will come near 5.8% yoy but if the TOP inflation increases, then CPI might come around 6.0% yoy in Q2 FY24. Accordingly, average CPI for FY24 will vary between 5.2%-5.4%.
While at all India level rainfall is 2% above normal till 12 July, the spatial distribution is uneven. The north-west India has rains of 59% above normal, the south peninsula has deficit of 23%. However, these uneven rains will have minimum impact on food grains production.
Further, to see the price cycles of cereals and pulses, the research desk analysed the monthly inflation data of cereals and pulses from Jan 2012 to till now (June 2023). The results indicate that in an increasing price cycle, cereals continue to rise on an average for 20-months and pulses 19-months. While in a declining price cycle, cereals prices decline continuously for 15-months and pulses by 21-months. Currently, cereals prices are on a declining trend, while pulse prices are on an increasing trend. It is thus crucial to mitigate the increase in pulse prices through Government intervention.
The industrial production based on IIP registered a growth of 5.2% in May from 4.5% in April. For the first two months IIP registered a growth of 4.8%. The mining sector recorded a growth rate of 6.4% in May, manufacturing sector also witnessed growth, with a rate of 5.7%.
Uneven balancing of risks in the US financial system is getting elongated as replenishing the TGA (Treasury General Account) post debt ceiling negotiations which has been the imminent priority for the Fed, coupled with Fed’s targeted balance sheet reduction and Quantitative Tightening (QT) would squeeze liquidity significantly out of the system. Interestingly, the squeeze in liquidity itself may work for a ~25 bps-plus increase in prevailing interest rates across tenors, fulfilling Fed’s desire if it wishes to temporarily pivot for a longer period for now.
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