India's CPI Dips to 5-Year Low Amid Vegetable Price Drop, Future Path Uncertain

India's Consumer Price Index (CPI) inflation fell to a 5-year low of 3.54% in July 2024, driven by a sharp decline in vegetable prices. SBI cautions that future economic challenges remain, despite the positive development. Core inflation rose slightly, highlighting sector-specific pressures.

India's Consumer Price Index (CPI) inflation dropped to 3.54% in July 2024, its lowest in nearly five years, largely driven by a decline in vegetable prices. However, despite this positive development, the State Bank of India (SBI) has warned of challenging times ahead, according to its latest research report. A significant fall in vegetable inflation, from 29.3% in June to 6.8% in July, was a primary factor in achieving this multi-year low, with the weighted contribution of vegetables to overall CPI shrinking from 1.77% in June to 0.55% in July.

Additionally, moderation in fruit and fuel prices contributed to easing inflationary pressures. Yet, this relief was dampened by a slight increase in core CPI inflation, which excludes food and fuel prices. The SBI report notes a shift in global monetary policy dynamics, with central banks increasingly prioritizing domestic economic conditions over synchronizing with U.S. rate decisions.

Core CPI rose from 3.12% in June to 3.30% in July, driven by increased mobile tariffs, and the transport and communication segment saw inflation rise from 0.97% in June to 2.48% in July. Food inflation, at 5.06% year-on-year in July, was affected by higher base effects. Despite the positive inflation data, concerns persist over uneven monsoon rainfall and its impact on food prices. With La Nina conditions strengthening, excessive rainfall in August and September could reignite food price inflation. Geopolitical uncertainties also pose risks to the economic growth outlook, with GDP expected to surpass 7% in Q1 FY25. The RBI has deferred potential rate cuts to December 2024 or February 2025, maintaining a tight liquidity stance to control inflation.

(With inputs from agencies.)