Despite core inflation drifting marginally from the current levels, headline CPI inflation is seen volatile and above 4% in both FY24 and FY25, Axis Bank said in a report.

“We forecast an average inflation of 5.6% in FY24 and 4.8% in FY25 even though core inflation is seen being somewhat more benign,” the bank said in its report titled ‘Outlook 2024: India resilient in a growth-challenged world’.

Food inflation is likely to remain volatile, with new supply shocks, compounded by the rising incidence of erratic monsoons, cyclonic disruptions, and hailstorms, the report noted.

While tomato prices fell in September and October, prices of cereals, pulses, and onions are rising. Such shocks increase the risk of entrenching inflation expectations, it said.

Food inflation, based on the Consumer Food Price Index, has remained consistently above the 6% mark since July. Food inflation constitutes 39% of the overall index.

Core inflation, on the other hand, has remained consistently below 6% in April-October, and is expected to remain subdued in the rest of the financial year as well. This is largely a result of a significant easing of services inflation as compared to core goods inflation.

In the core CPI basket, which accounts for 47.3% of the overall basket, the inflation rate of services components during October was at 3.6%, while that of the goods component was at 4.9%. Both goods and services components roughly carry 50% weight each in the core CPI basket. Core inflation in October was at a 42-month low of 4.2%.

“At the higher end of India’s workforce, due to the slowdown in services exports, wage pressures have eased meaningfully, while the placement season has been disappointing for graduating students. Even in the middle range of employment, perhaps best measured in services inflation, inflationary trends have eased,” the Axis Bank report said.

Moreover, the report suggested that going forward, if the state and central governments continue to focus on infrastructure, medium-term trends on inflation would remain benign despite a 7%+ GDP growth. “While capex increases demand in the near term, the resultant increase in supply keeps medium/longer-term inflation in check.”

Also, If the government sticks to the fiscal deficit target of 4.5% of GDP by FY26, implying a reduction of 0.6% annually over the next two years, core inflation is likely to remain subdued, the report said.