Retail inflation declined to a 25-month low of 4.25 per cent in May mainly on account of softening prices of food and fuel items, with experts saying that RBI is expected to hold interest rates steady in the current fiscal.
This is the fourth straight month when retail inflation has declined and the third straight month of Consumer Price Index (CPI) based inflation remaining within the RBI's comfort zone of below 6 per cent.
CPI-based inflation stood at 4.7 per cent in April and 7.04 per cent in May 2022.
At 4.25 per cent, retail inflation is the lowest since April 2021 when it was 4.23 per cent.
Inflation for the food basket was at 2.91 per cent in May, lower than 3.84 per cent in April. The food basket accounts for nearly half of the CPI.
Inflation in fuel and light eased to 4.64 per cent, from 5.52 per cent in April.
CPI inflation print for May eased more than expected, with the positive surprise chiefly driven by the food and beverages segment. Nevertheless, concerns loom on the horizon regarding the potential impact of a sub-par monsoon on food inflation in the second half of this fiscal.
ICRA Chief Economist and Head of Research and Outreach Aditi Nayar said the headline CPI inflation may rise mildly to 4.5-4.7 per cent in June 2023 based on the early uptrend in the prices of most of the food items, barring edible oils.
ICRA expects an extended pause by RBI through FY2024, and the stance to remain unchanged over the next couple of policy meetings, Nayar said.
Barclays, MD & Head of EM Asia (ex-China) Economics, Rahul Bajoria said inflation moderated further in May, given the high base and some sequential easing in energy costs. The RBI is likely to watch for the persistence of core inflation and the impact of El Nino on food prices in the coming months.
The decline in inflation was mainly driven by food items led by 'oils and fats' and vegetables where inflation fell by 16 per cent and 8.18 per cent respectively.
However, inflation in cereals and pulses came in higher at 12.65 per cent and 6.56 per cent respectively.
Experts said the monsoon forecast and performance will hold clues to future movements in food inflation, and pulses will be more vulnerable in this context.
India Ratings and Research (Ind-Ra) said going forward inflation is expected to remain in the 4.4-5.4 per cent range for the rest of this fiscal. It expects RBI to maintain a pause on interest rates for the rest of the current fiscal.
Last week, the Reserve Bank kept policy rates unchanged at 6.5 per cent and projected retail inflation for the current fiscal to average 5.1 per cent. June quarter inflation was projected at 4.6 per cent.