India: Inflation eases in August
Inflation eased to 6.8% in August, coming in below July’s 7.4% and marking a slightly sharper deceleration than was expected by the market. As expected, food prices rose at a softer rate in August—aided by government imports—after a surge in vegetable prices in July.
The trend was unchanged, with annual average inflation coming in at July’s 6.0% in August. Meanwhile, core inflation dipped to 4.8% in August from 4.9% in July.
Lastly, consumer prices dropped 0.05% over the previous month in August, contrasting July’s 2.93% increase. August’s result marked the weakest reading since December 2022.
Our panel expects inflation to fall back into the Central Bank’s 2.0–6.0% target range in September, and continue declining until settling above the midpoint of the target range in 2024. A key upside risk is the El Niño weather pattern, which tends to reduce India’s rainfall and, therefore, its agricultural output. August was the driest month in 120 years, and precipitation during the first eleven days of September was also deficient.
Analysts at Nomura said:
“We expect a sharp fall in CPI inflation to ~5.5% y-o-y in September (back within the RBI’s? target range), due to the continued fall in vegetable prices, cut in LPG cylinder prices, and capped core inflation pressures. Beyond September, we expect headline inflation to remain around 5.0-5.5% until January, before cooling to sub-5% from February 2024 onwards.”
Analysts at Goldman Sachs commented on the impact of inflation on Central Bank policy:
“We reaffirm our view that the RBI will look through the surge in food inflation and take comfort from the decline in core inflation, and remain on hold with the repo rate at 6.50% for the rest of the year.”