Retail inflation drops further on the back of broad-based easing

• The Consumer Price Index (CPI)-based inflation dropped to 2.8% in May, the lowest reading since February 2019, from 3.2% in April, mainly led by falling food inflation
• Food inflation fell to 1%, the lowest since October 2021, from 1.8% in April, driven by falling inflation in cereals and a deeper deflation in vegetables and spices. Fuel inflation reversed trend and eased marginally to 2.8% from 2.9%. Core inflation also eased to 4.18% from 4.23% in April
• A robust rabi harvest and expectations of healthy kharif output given the forecast of above-normal monsoon should keep food inflation in check this fiscal. Additionally, assuming no sustained impact of geopolitical tensions, Brent crude oil prices are projected to remain subdued, ranging between $65 and $70 per barrel in the current calendar year, which should help contain nonfood inflation.
• Given the current inflation trajectory, we expect headline inflation to average 4% this fiscal, from 4.6% last fiscal. Lower inflation keeps the window open for one more repo rate cut by the Reserve Bank of India (RBI) apart from the 100 basis points cut announced so far.