In April, India's Consumer Price Index (CPI) inflation slightly decreased by 2 basis points to 4.83% year-over-year, compared to 4.85% in March, according to a recent report by Bank of America (NYSE:BAC) (BofA). This figure came in slightly below both BofA’s and market consensus estimates of 4.9%. On a month-to-month basis, the CPI index rose by 0.48%, which is lower than the typical April median of 0.57%. This was influenced by a slight uptick in food inflation, primarily driven by cereals, fruits, and oils, offsetting the price decline in condiments. Additionally, further deflation in the fuel and light segments helped to lower the overall CPI.
Core inflation, which excludes food and fuel, softened by 5 basis points in April compared to March, bringing it down to 3.22% year-over-year. Similarly, BofA’s preferred measure of core-core inflation (excluding food, fuel, petrol, diesel, and gold) also dropped to 3.04% year-over-year. Notably, a sharp increase in gold prices led to a 3% month-over-month rise in the personal care category.
Exhibit 5 in the report highlights the significant impact of elevated food inflation on overall price dynamics. Early data on food prices suggests that May's CPI inflation could rise to around 4.9% year-over-year. In terms of goods and services, goods CPI inflation edged up by 10 basis points to 5.6% year-over-year in April, while services CPI inflation softened by 20 basis points to 2.8% year-over-year. Based on April’s data, BofA has revised its FY25 average CPI inflation estimate downward by 20 basis points to 4.3% year-over-year, while the Reserve Bank of India (RBI) maintains its estimate at 4.5%.
In March, India's Industrial Production (IIP) growth slowed to 4.9% year-over-year from 5.6% in February, falling below BofA's estimate of 5.9% and the consensus estimate of 5.7%. On a sequential basis, the actual month-over-month growth of 8.2% was significantly lower than the typical March median of 11.7%. Sector-wise, mining experienced a major slowdown, whereas manufacturing and electricity showed modest improvements. On the use-based side, capital and consumer non-durable goods saw higher growth in March compared to February, while other sub-categories, particularly primary goods, decelerated. Consequently, FY24 IIP growth stands at 5.9% year-over-year, slightly higher than the 5.5% recorded in FY23.
Looking ahead, BofA predicts a potential rate cut by the RBI in October 2024, even as US Federal Reserve rate cuts may be delayed. BofA notes that the RBI Monetary Policy Committee (MPC) is not in a hurry to cut rates, anticipating a slow and shallow easing cycle. They forecast the first rate cut in October 2024, as inflation targets are expected to meet the 4% benchmark.
Although CPI inflation may rise above 4% again in the second half of FY25, the anticipated disinflationary gains should prompt the RBI to begin easing. By October 2024, the RBI MPC would have maintained its hold for about 18 months, making a rate cut a well-considered decision. BofA also suggests that a change in stance may precede the rate cut, though a simultaneous move remains a possibility.
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