March CPI inflation seen at 15-month low of 5.7% due to favourable base

India's headline retail inflation is expected to have dropped to a 15-month low in March thanks to a favourable base. According to a Moneycontrol survey of 15 economists, Consumer Price Index (CPI) inflation likely fell sharply to 5.7 percent last month from 6.44 percent in February.

At 5.7 percent, CPI inflation would be returning to the Reserve Bank of India's (RBI) mandated tolerance band of 2-6 percent after two months. Since the start of 2022, inflation has been above the 6 percent threshold in all but two months, and has spent 41 months in a row above the central bank's medium-term target of 4 percent.

The Ministry of Statistics and Programme Implementation will release retail inflation data for March on April 12.

Inflation in March

Inflation is seen to be falling significantly in March primarily due to a favourable base effect. In March 2022, the CPI had jumped 1 percent month-on-month, creating a high base for the inflation print in March this calendar year.

Base effect apart, economists see food prices as being broadly flat.

"This stickiness in prices comes amid larger declines seen in price of wheat and atta, along with moderation in cooking oil, vegetable, and egg prices, all of which eased sequentially," said Rahul Bajoria, Head of EM Asia (ex-China) Economics at Barclays.

However, prices of other food items – such as dairy products, fruits, meat, and pulses – rose sequentially. On the whole though, a high base is expected to drag the 'food and beverage' group inflation below 5 percent from 6.26 percent in February.

On the other hand, fuel prices are expected to push up overall inflation on account of the hike in LPG prices announced in March.

Core inflation, or inflation excluding food and fuel items, is again seen to be elevated at around 6 percent.

Policy impact

The latest inflation data comes days after the RBI's Monetary Policy Committee (MPC) surprised markets by leaving the policy repo rate unchanged at 6.5 percent on April 6.

The rate-setting panel cited the need to see the impact of its 250 basis points worth of rate hikes in 2022-23, adding that it stood ready to act should the need arise. However, economists don't think the MPC will hike interest rates any further and see a 'prolonged pause' – unless inflation again moves to the 6 percent-plus territory.

"…inflation is likely to remain sub-5 percent in April-June, albeit driven by favourable base effects," economists from Standard Chartered Bank said.

Per the RBI's latest forecast, CPI inflation may average 5.2 percent in 2023-24, with quarterly forecasts ranging from 5.1 percent to 5.4 percent.

The MPC is set to meet next between June 6-8, by which time inflation data for April will also be available.

Industrial growth

The statistics ministry will also release Index of Industrial Production (IIP) data for February on April 12. This is expected to show that industrial output grew by 5.8 percent, according to the median of estimates of 13 economists polled by Moneycontrol.

At 5.8 percent, the expected February IIP growth figure would be the highest in three months. In January, industrial production had risen by 5.2 percent.

Economists were roughly evenly split on whether IIP growth would slow down in February compared to March. According to Rupa Rege Nitsure, Group Chief Economist at L&T Finance, weaker high-frequency data – such as a fall in core sector growth – indicated IIP growth could fall in February.

Data released on March 31 showed that the output of  eight core sectors had increased by 6 percent in February, down from 8.9 percent in January. Core industries account for around 40 percent of the IIP. As such, the former's performance is seen as a lead indicator of the latter.

Meanwhile, India's merchandise exports have contracted in three of the past five months on a year-on-year basis, with growth in one of the other two months at an anaemic 1.5 percent. Over this five-month period, India's goods exports shrank by 2.5 percent on average.