Indian consumer price inflation slows down further in May on base effect

Indian inflation slowed further in May, owing to a huge favourable base effect. The consumer price inflation decelerated to 2.18 percent from April’s 2.99 percent on a year-on-year basis. Market projections were for the inflation to slow to 2.4 percent.

The sequential momentum in the inflation stayed modest due to subdued prices of pulses and perishable food items. The recent weakness in food inflation is unexpected as the seasonal up-tick that usually occurs in the pre-monsoon months has been muted so far. This might likely reflect the lingering effect of demonetisation and favourable supply conditions because of government initiatives.

On the other hand, core inflation stayed low at 4.22 percent year-on-year. On a month-on-month basis core inflation strengthened 40 basis points because of an uptick in select services inflation components such as ‘household goods & services’ and ‘education’. Soft momentum in the ‘personal goods’ category, further capped the rise, reflecting a sharp decline in prices of gold.

The drop in core inflation is consistent with the excess capacity and ongoing mixed economic rebound. Strong auto sales prints for the month of May underline the strength in private consumption. But the moderation in other activity indicators, such as the manufacturing PMI, implies that the rate of rebound after demonetisation has been modest.

The monetary policy is now believed to have become more data-dependent that the past after the RBI removed its hawkish stance during the June policy meeting. If the monsoons pan out to be normal as is now projected, a modest easing of 25 to 50 basis points is likely, noted ANZ in a research report.