CPI inflation at a 5-yr low: SBI warns about bumpy road ahead due to uneven monsoon

Retail inflation fell to a 5-year low in July at 3.54 per cent, as per the official data released on Monday. However, the State Bank of India (SBI), in its latest report has stated that the road ahead could be bumpy due to the uneven monsoon. 

“The distribution of monsoon is still uneven with the major foodgrain producing states having deficient rainfall. However, with La Nina getting precedence, excess rainfalls in August and September could result in crop loss and thus have a debilitating impact on food prices,” said SBI in the Ecowrap report. 

The report predicted inflation to remain elevated and hover above Reserve Bank of India’s (RBI’s) forecast of 4.5 per cent in FY25. “Domestic growth momentum is strong and GDP is expected to come above 7% in Q1 FY25, though geopolitical uncertainty is one of the risks to growth dynamics. Meanwhile, RBI is maintaining tight liquidity to control inflation. Given the current predicaments, the rate cut has been shifted to Dec 2024 / Feb 2025. The state wise evolution of CPI inflation shows most of the states witnessing a rate lesser than the national average,” it said. 

It also said that following the Fed appears to be a downward trend as the rate actions of various central banks – both from developed economies and emerging economies – have raised “a finger on the ubiquitous position of King Dollar as the central instrument of trade and currency realpolitik gets shrouded in uncertainty”. 

The SBI stated that rate hike cycles across central banks are synchronised but during rate cut cycles it becomes unsynchronised, as evidenced from data of central banks including China, Chile, Brazil, Mexico, the UK, Canada as well as the European Central Bank. 

Retail inflation that eased to 3.54 per cent in July was 7.44 per cent in July last year, and 5.08 per cent in June 2024. Consumer food price inflation was 5.42 per cent in July – closer to the 6 per cent mark – as against the 11.51 per cent a year ago and 9.36 per cent in June 2024. 

Inflation in the food and beverages basket in July was 5.06%, slightly lower than 8.36% in June. Pulses inflation in July was 14.77%, cereals at 8.14%, and vegetables at 6.83%. Inflation in eggs rose to 6.76% in July, while in meat and fish, it was 5.97%. Analysts attribute the lower inflation to the statistical impact of a higher base and expect price pressures to continue until the new crop arrives.