As India awaits the latest Consumer Price Index (CPI) print, the spotlight is on inflation trends, which have significant implications for monetary policy and economic stability. In an exclusive interview, Santanu Sengupta, Chief India Economist at Goldman Sachs, recently shared his expectations on the upcoming CPI data and broader inflation dynamics. Here’s a breakdown of his insights:
CPI Outlook: A Six-Year Low on the Horizon?
Goldman Sachs’ inflation forecast for this month stands at 3.1%, slightly below the broader market consensus, which Sengupta notes could mark a six-year low for headline inflation. This decline is primarily driven by subdued food prices, which have experienced sequential contractions despite seasonal pressures.
“We are seeing food inflation quite benign, around 2%, which is roughly a 3.5-year low,” Sengupta said, emphasizing the steady easing in the food basket. Core inflation, which excludes volatile food and fuel components, remains stable at around 4-4.1%.
Impact of Rainfall on Food Inflation
A key factor underpinning this outlook is the expected healthy monsoon. The Indian Meteorological Department (IMD) has forecasted early and favorable rainfall, which typically boosts agricultural output and dampens food inflation. Sengupta noted that while pulses production has been underwhelming in recent years, strong imports have kept prices in check, even turning negative in some cases. He also highlighted promising signs for rice and wheat, with decent sowing data and supportive minimum support prices (MSP) likely keeping their inflation contained.
However, oilseeds remain a potential pressure point, with prices currently elevated due to a high base effect, though a softening in global palm oil prices could help moderate this trend.
Core Inflation: Energy Prices in Focus
Turning to core inflation, Sengupta expects it to stay around 4%, citing a mix of domestic and global factors. Crude oil, a critical input for several sectors, has seen prices dip in recent months, trading near the $60 per barrel mark. This decline, coupled with the potential impact of U.S.-China trade tensions on global supply chains, could further ease core inflation pressures, particularly in the goods sector.
Domestically, India’s economic output remains steady, reducing the likelihood of significant wage-driven inflation in the services sector over the coming quarters.
RBI’s Rate Cut Path: Room for Easing?
On the interest rate front, Sengupta expects the Reserve Bank of India (RBI) to proceed with two more rate cuts, potentially in June and August, each 25 basis points, bringing the repo rate to 5.50%. This projection assumes inflation remains comfortably below the 4% mark, providing the RBI with the headroom needed to support growth without compromising price stability.
Looking ahead, the trajectory of inflation in the first half of next year will be critical in determining whether the RBI opts for deeper cuts. Should headline inflation remain subdued, the central bank may find additional room for easing.
Conclusion: Subdued, Yet Watchful
While the current inflation landscape appears favorable, with headline inflation potentially dipping to multi-year lows, several uncertainties remain. The balance of global commodity prices, domestic agricultural output, and evolving geopolitical factors will all play a crucial role in shaping India’s inflation trajectory over the coming quarters.
