Inflation finally dips below 6%. But will the downtrend sustain?

Consumer Price Index (CPI)-based inflation eased to 5.7% in March from 6.4% in February. The gauge had fallen below 6% - the upper limit of the inflation tolerance band of the Reserve Bank of India (RBI) - the last time in December 2022, only to surge soon thereafter and stay above through January and February 2023.

This time, though, the decline should sustain for three reasons:

• High base of last year played a big role in lowering inflation this March. The base had swelled due to a sharp surge in oil and food prices after the Russia-Ukraine conflict began last February, and due to strengthening demand after the third Covid-19 wave subsided. The high-base effect will remain supportive for the next 4-6 months.
  
• Most of the relief in March was due to lower food and core inflation, where some more downside is expected in the coming months. In food, deflation or on-year price decline in edible oils, vegetables, meat and fish supported. However, prices of cereals, milk and spices, despite some moderation, remained quite high. As the rabi crop enters the market in April/May, some of the moderation, especially in cereals, is expected to sustain. Also, assuming normal southwest monsoon, as predicted by the Indian Meteorological Department (IMD), and only a limited impact of the unseasonal rains in March, we expect food inflation to ease notably. But there will be pressure from milk prices, which are expected to be hiked over the coming months.
  Core inflation, too, fell below 6% after staying above it for the past 10 months. There was an across-the-board easing in core, led by personal care and effects (mainly gold and other ornaments), recreation and amusement, and transport and communication. As economic growth slows, from 7% last fiscal to 6% in this one, some softening of inflation is expected in line with waning demand. But the easing should be moderate due to continued pass-through of high input prices by producers.
  
• Fuel-related inflation continued to soften, driven by a high base and easier global oil prices. Despite the ~$4/barrel fall in global oil prices between January and March, domestic pump prices of petrol and diesel have not changed. If the government were to pass on that benefit, fuel inflation should ease considerably and positively influence headline inflation.