India’s inflation likely to hover around 5% in coming few months

India’s CPI inflation decelerated to 4.8% y/y in March, as compared with consensus forecast of 5%. Food inflation, which decelerated to 5.4%, mainly drove the decline in CPI inflation, but ‘fuels and light’ also helped in good measure.

If oil prices stabilize at USD 40, the latter is not expected to continue pulling inflation down in the future, according to ANZ. On a monthly basis, food CPI continued to be flat, stopping the seasonal drops of earlier months. Core inflation, excluding petrol, gasoline, food and fuels and light was flat at 5% y/y.

Meanwhile, monsoon rains are expected to be normal at 106% of long period average. However, the first round forecast is usually revised closer to the beginning of monsoon in June, but it is still encouraging, noted ANZ. Enough monsoon rains might increase the possibility of food inflation to remain low for a longer period of time and give certain good news for growth prospects, added ANZ.

‘Food’ and ‘fuel and light’ mainly drove the decline in March’s inflation; however, the Reserve Bank of India (RBI), is unlikely to respond to this data as it lowered rates just last week and looked comfortable in moving to a pause mode in the near-term, according to ANZ.

“We expect inflation to hover around 5% the next few months with another dip sub-5% likely”, said ANZ.

Moreover, the central bank is expected to keep the policy on hold through this year, but might lower rate one last time if monsoon rains are favorable enough to keep food inflation sustainably lower and growth continues to be weak, added ANZ.