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Inflation in goods and services other than fuel and food is likely to remain low, around 3% in the near term, owing to weak rural demand, softness in housing inflation and lower input cost pressures, according to economists.
India’s core inflation declined to its lowest level of 3.5% in January, compared with 3.8% in the previous month, according to data released last month. Core inflation remained below 4% for the second consecutive month, bringing the overall consumer inflation number down to 5.1%.
Economists said core inflation is most likely to settle around the 3% mark until the first quarter of 2024-25 and start rising thereafter due to a lower base.
“The core CPI (Consumer Price Index) inflation is expected to bottom at 3.3% in Q1FY25 due to supportive base-effect and then gradually rise as the impact of base-effect reduces,” said Gaura Sengupta, economist, IDFC First Bank. “Incremental support to company profits from reduction in input cost pressures is expected to reduce, hence we expect the seasonal momentum in core inflation to normalise in FY25.”
Manufacturing activity data released last week showed input inflation falling to the lowest level in 43 months, with only 8% of panellists of the private survey passing on costs to consumers.
Besides input price pressures and greater competition keeping prices contained, weak rural demand is expected to keep core inflation contained.
“The fall in core inflation reflects the effect of RBI’s tightened monetary policy. The decline has been much sharper in the rural areas where it stands at 3.6% in January 2024, which is also illustrative of the rural distress. The weak rural demand could mean that the core CPI would remain around 3%,” said Paras Jasrai, senior analyst, India Ratings and Research.
Worrying trend
Some experts also cautioned about declining core inflation at a time when the economy is “roaring”.
The Indian economy expanded 8.2% in the first three quarters of the year and is likely to end the fiscal with 7.6% expansion.
“Core inflation declining at a time when the economy is roaring is symbolic of depressed wage growth and thus has had an impact on services inflation,” said former chief statistician of India Pronab Sen. India’s services inflation declined much lower to 3.3% in January, compared with 5.4% January 2023 and 4.7% in April 2023.
Despite higher 8.4% growth in the third quarter, India’s private final consumption expenditure remained muted at 3.5%.
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