Inflation rides on a base effect, sequential momentum easing

• April saw consumer price inflation (CPI) print at 4.7%, down from 5.7% in March. A considerable part of the fall is due to a high-base effect of last year when the Russia-Ukraine conflict intensified, pushing up fuel, metal, and food prices. Accordingly, there was an across-the-board benefit.
  
• A high-base effect-led correction warrants close inspection of sequential momentum. Month-on-month, there seems a near broad-based uptick across sectors, including in core inflation. But much of this is due to seasonal factors and can be misleading. Correcting for seasonal elements, there is a perceptible sequential easing across most inflation categories except pulses, sugar, spices, education and personal care and effects.
  
• We expect CPI inflation to average 5% this fiscal from 6.7% in the last on the assumption of a normal monsoon. A high base should favour inflation rates for another a month or two. In the coming months, the key monitorable for food inflation will be the progress of monsoon given the El Niño risk. Core inflation, the pain point for the Reserve Bank of India (RBI) due to its stickiness, should see limited easing as producers continue to pass on input costs.
  
• The Index of Industrial Production (IIP) slowed to 1.1% on-year in March, compared with 5.8% in February. The broad-based slowdown in the manufacturing sector reflects the impact of weakening global and domestic demand.
  
• External demand is expected to be a bigger drag this fiscal with a sharper slowdown in advanced economies relative to India. While rising interest rates will moderate domestic demand as well, the key monitorable for India will be monsoon, and how it impacts rural income prospects.