Easing of CPI is an indication of further rate-cut next month

The CPI inflation moderated to 77-month low of 2.10 per cent in June, which is a tell-tale of yet another round of rate cut in the bimonthly MPC meeting which is due next month.

The decline is mainly due to decline in food inflation, which is also at 77-month low of 0.20 per cent, led by continued decline in food items particularly vegetable, pulses and spices.

The cooling was entirely led by the food and beverages segment, which witnessed a deflation of 0.2 per cent after a gap of 75 months, after printing at 1.5 per cent in the previous month. This was led by softer prints for 11 of the 12 sub-groups, including a widening deflation in vegetables, pulses, spices, and meat and fish. However, the core-CPI inflation inched up to 4.6 per cent in June from 4.3 per cent in May, driven by miscellaneous items.

Looking ahead, while food prices have witnessed a seasonal sequential uptick in July so far, the extent of the same has been relatively benign compared to that seen in the year ago month, particularly in the case of vegetables. Besides, a majority of food items have recorded a lower inflation in the month. This is expected to lead to a further dip in the F&B inflation print in July, unless there is an unusual spike in vegetable prices in the latter part of the month. Icra expects the headline CPI inflation to recede further and bottom out at 1.9 per cent in July, despite an unfavourable base.

Kharif sowing is up by a robust 6.6 per cent as on July 11, which augurs well for containing food prices. However, analysts remain watchful of the episodes of heavy rainfall and flooding across some states in the remaining part of monsoon season, that could damage crops that are already sown and consequently impact food prices.

Following the marginally lower-than-projected CPI inflation print for Q1, experts see the Q2 print to materially undershoot the MPC’s current forecast of 3.4 per cent amid the benign outlook for July, which is likely to prompt the MPC to cut its FY26 CPI inflation projections further from 3.7 per cent currently.

Given the weakness in a majority of the available high frequency indicators, one foresees the GDP growth to print at 6.0-6.5 per cent in Q1, the data of which will only be available after the MPC’s meeting.

With a firmly benign inflationary trend envisaged going ahead, notwithstanding the tumult on part of trade led restrictions and non-linear pass-through of such vagaries, the plot seems to be spiced with a further 25 bps rate cut, as per Ecowrap, to give an adrenaline boost to the economic juggernaut as global developments necessitate us to build today for tomorrow.

One cannot rule out the possibility of a final 25 bps rate cut in the next MPC meeting next month, carrying forward the front-loading seen in June.

EoM.