This year we have seen an early monsoon and also good monsoon, especially in Mumbai. It is expected to bear a good crop this time around. What could it mean for the cropping season and inflation as well? What are your predictions?
Suvodeep Rakshit: The good news was delivered sometime late in May when there was an early onset of monsoon. But if you look at the data on the rainfall, till yesterday, one would see that the rainfall across India is around 17% below the normal rainfall for the season, for the first 17 days. Now, this is not good news as such but the good part is that the monsoon progress has started again. Till around the end of May, early June it had stalled somewhere in the middle of the country and has started again, which means that hopefully by the end of the month, we will see the monsoon cover the rest of the country.
Now, the important part is that more than the June rainfall, the July and August rainfall is more important for crop production. So, there could be delayed sowing in terms of the kharif crops. But if July and August rainfall is good, as almost 60% to 65% of the rainfall for the monsoon is around that period, we could see the crop production staying on the positive side and that should be, I would say, the key metric to watch out for. From an inflation perspective, we have seen inflation coming off, especially on the food inflation coming off from around 11% peak sometime mid last year, down to currently around 1%, this is the food inflation and the overall inflation is now down to around sub-3%.
This should hopefully continue over the next few months, and we should see headline inflation below or between 3-3.5% for a prolonged period. The full-year average for FY26 should be around 3.5% which is a very good thing in terms of the inflation outcome, and we should note that the RBI’s target of CPI inflation is 4%. If we have good July and August rainfall, then the prospects of these inflation prints being sub-4% should continue till the end of the year which is around the December period.
While you are talking about a very optimistic inflation target, let’s take a look at the RBI commentary. In Q4 FY26, RBI inflation target is around 4.4%, slightly higher than the target of 4% that we have. What are you making of this figure because we understand that macros are looking good right now; both CPI and WPI are in control, manufacturing data shows that the trade deficit has reduced. Macros are looking rather stable right now. What would indicate reaching that 4.4% figure by the end of FY26?
Suvodeep Rakshit: The last quarter of FY26, which is the January to March of 2026, has an unfavourable base effect on the inflation trajectory. So, from a sub-4%, we will move closer to 4- 4.5% range during those three months. I think on a sustained basis, that is where the comfort zone in terms of the inflation trajectory would be, somewhere between 4% and 4.5%.
Now it is not necessarily a shock that is leading to the above 4% inflation prints which are estimated, but this is more of an unfavourable base effect. Of course, in terms of risk, we do not necessarily know whether the monsoon will pan out the way it is expected to in terms of estimates. There could be food price shocks over the next few months, which will contribute to inflation moving towards the 4% plus mark earlier than what we are expecting. So, those kinds of risks will be there. Apart from the monsoons and the food prices, we could also have upside to the crude oil prices which can kind of filter in in terms of higher domestic prices not, just of the retail fuel prices, but the wider industrial fuels also which will have an impact on the overall inflation numbers. So, from that perspective there are upside risks from both the global as well as the domestic side. It is just that as a base case, we have normal monsoons with the prospect of the crop production being on a positive side, which is where the cap in terms of the inflation is coming in, but, of course, the risks continue.How is urban consumption demand trending right now? We are hearing from a lot of these consumption players and counterparts in the market that while rural is recovering slightly and although we have a good monsoon and that could give a fillip to the rural economy, what about the urban consumption demand because that seems to have plateaued out very recently? Do you see any improvement on this front?
Suvodeep Rakshit: Urban consumption has been weaker relative to the rural demand and the rural demand actually has been quite stable. On the urban side, we need to wait for a few more months because a few drivers have fallen in place. We have seen a cyclical recovery in terms of the government spending we have seen both the state and the central government. We have seen a gradual pickup and a very small pickup in terms of the urban formal jobs over the past few months.
The government in the Budget announced income tax relief and these typically take time to seep into the consumption demand per se. We also have had the RBI loosening the monetary policy as well as liquidity in the system which will also translate with the lag, a couple of quarters lag in terms of demand in the urban consumption. So, we are hopeful that urban consumption will pick up some time over the next couple of quarters and the drivers are in place.
Maybe the festive season is where we see the first indications of a cyclical recovery. I would not classify it as a structural recovery and I am not sure whether the recovery will continue over multiple quarters, but we will see some cyclical pickup since some of the drivers that we track in terms of the urban consumption, have been starting to show an uptick over the past few months.
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