CRISIL Forecasts 4.5% Inflation for FY 2024 with Normal Monsoon and Stable Commodity Prices

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CRISIL Predicts 4.5% Inflation for FY 2024 Amidst Expected Normal Monsoon and Easing Food Prices

Team Finance Saathi

18/Jun/2024

Key Points

CRISIL projects average inflation at 4.5% for the current financial year.
Food inflation remains high at over 8.5% for four months, but is expected to ease with a normal monsoon.
Non-food inflation remains low due to stable commodity prices, while rural demand is anticipated to catch up to urban consumption.

CRISIL's forecast of 4.5% inflation for FY 2024 reflects a nuanced understanding of various economic factors at play. The expectation of a normal monsoon is critical, as it directly affects agricultural output and subsequently food prices. A good monsoon usually leads to abundant harvests, thereby reducing the pressure on food prices. In contrast, any deviation from normal monsoon patterns can lead to supply shortages and increased prices.

The report highlights that while food inflation remains a pressing issue, especially in categories like cereals and pulses, there is optimism that a normal monsoon will help mitigate this challenge. The firm expects non-food inflation to remain relatively low, helped by stable global commodity prices. This stability in non-food prices will provide some relief against the high food inflation.

Rural vs. Urban Demand

A significant aspect of the report is the anticipated rebalancing of domestic demand. Over the past few years, urban consumption has outpaced rural demand. However, this fiscal year is expected to see a shift. The expected above-normal monsoon will likely improve rural incomes, boosting purchasing power in rural areas. This increase in rural demand is crucial for overall economic growth, as a significant portion of the population resides in rural regions.

Conversely, the urban economy may face headwinds due to tighter credit conditions. The slowdown in bank retail credit growth indicates that consumers may find it more challenging to obtain loans for big-ticket purchases. Additionally, regulatory measures to limit bank lending to Non-Banking Financial Companies (NBFCs), which are significant providers of consumer loans, could further tighten credit availability. This might dampen urban consumption, which has been a driving force in the economy.

Food and Non-Food Inflation Trends

The CRISIL report provides a detailed breakdown of inflation trends. Food inflation, driven by rising prices in cereals and pulses, has been a persistent concern, staying above 8.5% for the last four months. This trend highlights the volatility in food prices, which can be influenced by various factors such as weather conditions, supply chain disruptions, and global price movements.

In contrast, non-food inflation has been relatively subdued. Stable global commodity prices have played a significant role in keeping non-food inflation low. This stability is crucial as it helps to offset some of the pressures from high food inflation, thereby preventing a sharp increase in overall inflation.

Impact of Credit Conditions on Urban Economy

The report points out that tighter credit conditions could impact the urban economy significantly. With bank retail credit growth slowing down, consumers may find it harder to finance purchases through loans. This slowdown in credit growth is partly due to regulatory measures aimed at controlling excessive lending, particularly to NBFCs. NBFCs have been crucial in providing consumer loans, and any restriction on their lending capabilities could reduce the availability of credit to consumers.

The impact of these tighter credit conditions is expected to be more pronounced in urban areas, where consumers rely more on credit for purchasing goods and services. This could lead to a slowdown in urban consumption, which has been a key driver of economic growth.

Conclusion

CRISIL's forecast of 4.5% inflation for FY 2024 provides a comprehensive outlook on the economic factors influencing inflation. The expectation of a normal monsoon is a critical factor that could help ease food inflation. Meanwhile, non-food inflation is expected to remain low due to stable commodity prices. The report also highlights a potential rebalancing in domestic demand, with rural demand catching up to urban consumption. However, tighter credit conditions could pose challenges for the urban economy.

Overall, CRISIL's analysis underscores the complexity of managing inflation in a diverse economy. Policymakers will need to monitor these trends closely and be prepared to take action to ensure economic stability and growth.

Also Read : Global Airlines Target India as the Next Big Travel Market with Massive Expansion Plans

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