Crisil Economy First Cut: Pouring a breather

India’s retail inflation rate has more than halved over the past year, slipping even below the lower end of the Reserve Bank of India’s tolerance band (2%). It slid to 1.6% in July from 2.1% in June. Food saw steeper deflation (-1.8% vs -1.1%), while core inflation recorded a sharp decline (3.9% vs 4.4%)  as the impact of mobile tariff revision wore out. Core inflation, excluding mobile tariffs, dropped at a more modest pace (4.0% vs 4.2%).

We expect headline inflation to average 3.5% this fiscal from 4.6% in the last. Healthy agricultural production is expected to keep food inflation in check. Assuming geopolitical uncertainties remain under control, Brent crude oil prices are projected to remain subdued at $60-65 per barrel in the current fiscal, which should help contain non-food inflation. 

The sharp fall in retail inflation should buoy household purchasing power, particularly in the lower income segments. The trend also creates room for further monetary policy easing, which should benefit the interest-sensitive consumption segments. We expect another repo rate cut this fiscal.