India’s Consumer Price Index (CPI) inflation dropped to 3.54% in July 2024, its lowest level in nearly five years. This decline was primarily driven by a significant fall in vegetable prices. Despite this positive shift, the State Bank of India (SBI) warns that the road ahead could be challenging.
The sharp drop in vegetable inflation—from 29.3% in June to just 6.8% in July—was key to the CPI’s decline. Vegetables’ contribution to the overall CPI also decreased markedly, from 1.77% in June to 0.55% in July.
The prices of fruits and fuel also moderated, easing inflationary pressures further. However, this relief was partially offset by a slight increase in core CPI inflation, which excludes food and fuel costs.
SBI’s report notes a shift in global monetary policy dynamics, with central banks increasingly focusing on domestic economic conditions rather than aligning with U.S. rate decisions. This marks a departure from the previous trend of closely following U.S. Federal Reserve policies.
For the first time in five years, CPI inflation has dipped below the Reserve Bank of India’s (RBI) 4% target, largely due to the steep decline in vegetable prices. Core CPI rose from 3.12% in June to 3.30% in July, influenced by higher mobile tariffs. The transport and communication segment saw a significant rise in inflation from 0.97% to 2.48% in the same period, highlighting sector-specific pressures.
Food inflation, which stood at 5.06% year-on-year in July, was impacted by a higher base effect. Concerns persist over uneven monsoon rainfall, especially in major food grain-producing states, which could threaten food price stability.
The strengthening La Niña conditions suggest the possibility of excessive rainfall in August and September, raising concerns about potential crop damage and a resurgence in food price inflation.
Looking forward, inflationary pressures might persist and could exceed the RBI’s forecast of 4.5% for FY25. Despite robust domestic growth, with GDP expected to exceed 7% in Q1 FY25, geopolitical uncertainties and global monetary policy shifts pose risks.
The RBI is expected to delay potential rate cuts until December 2024 or February 2025, as it maintains a tight liquidity stance to manage inflation.
State-wise, most states reported CPI inflation rates below the national average, although rural areas generally experienced higher inflation compared to urban regions. Only a few states saw higher inflation in urban areas.
Historically, global capital flows have been influenced by U.S. Federal Reserve rate changes, but the current rate-cutting phase is less synchronised globally. Countries like China, Chile, Brazil, Mexico, the UK, Canada, and the European Central Bank have already started reducing rates, while the Fed is anticipated to follow suit in September 2024.
India’s Index of Industrial Production (IIP) grew by 4.2% in June 2024, down from 6.2% in May. The mining sector led growth with a 10.3% increase, followed by electricity at 8.6% and manufacturing at 2.6%. For April-June 2024, industrial growth was 5.2%, up from 4.7% in the same period last year.
As India navigates the balance between growth and inflation, the coming months will be crucial for shaping the country’s economic trajectory amidst global monetary shifts and evolving weather patterns.
