All Eyes On Budget! How Gold And Silver Prices In India Eased Core Inflation In December?

Despite the marginal cooling in CPI inflation to 5.22% in December, the price indicator continues to stay stubbornly above 5%. Meanwhile, core inflation also dipped marginally, to which economics attribute the decline in gold prices and silver prices in December as the key reason. Going ahead, the focus will be on the Budget, with expectations of reforms that could improve consumer demand and balancing of revenue spending, as these two will be pivotal for core inflation.

Core inflation has moderated to 3.7% in December 2024, compared to 3.8% prior.

As per Emkay Global, core inflation moderated slightly (3.7% YoY vs 3.8% prior). However, monthly momentum at -0.1% MoM was the lowest in over seven years, and the first monthly decline since Sep-23, reflecting the continued weakness in domestic demand. The downtick was led by personal care and effects (0.1% MoM vs 0.3% prior), mainly due to lower gold and silver prices during the month. All other categories remained below 0.4% MoM.

Further, Madan Sabnavis, Chief Economist of Bank of Baroda said, "There has been a usual seasonal moderation in the housing component of Core. Apart from this, miscellaneous component edged down led by personal care and effects (9.7% in Dec'24 from 10.4% in Nov'24), on account of softening in gold prices."

What is core inflation?

In general terms, core inflation is indicated as the long-run trend in the price level. For measuring the long-run inflation, transitory price changes are excluded. One of the methods to achieve this is by excluding items that are frequently subject to volatile prices such as food and energy.

Gold Prices In India:

During the December month, gold prices in India had dipped by 0.6% at retail jewellers in 22K and 24K. The 10 grams of gold stood at Rs 71,110 in 22K and Rs 77,560 in 24K by the end of December 2024. Since Donald Trump's win in the US Presidential Election in November, gold prices have been under pressure due to the strengthening of the dollar and treasury yield till the end of 2024. The start of 2025 has been bullish for gold with 22K and 24K prices surging by 2.5% each in January 2025 so far, owing to global uncertainties.

Currently, gold prices are at Rs 79,960 per 10 grams in 24K, at Rs 73,330 per 10 grams in 22K, and at Rs 59,970 per 10 grams in 18K.

Silver Prices In India:

Silver prices are sharper than the decline in gold. 1kg silver price dropped by 1.09% in December 2024 and ended the year at Rs 90,500 levels. Currently, silver price is at Rs 92,500 per 1kg.

What's Ahead?

Sabnavis said, "Going forward, the demand picture is likely to improve with Union Budget's expected focus on improving consumption demand of the economy. However, fine balancing of revenue spending will keep core inflation largely capped."

The BOB economist added, "Upcoming Budget holds the key. Policies may be expected to improve the food supply chain so that the impact of adverse climate-related shocks on inflation is mitigated to some extent."

Meanwhile, CPI inflation at 5.22% was better than expected in December. Also, CPI stays below RBI's upper tolerance limit of 6% for the second consecutive month but is still away from its main objective of 4% CPI.

"Headline CPI got the desired comfort from a moderation in food inflation, especially vegetable inflation. The trajectory of vegetable inflation is continuing its downtrend in Jan'25 as well (first 12 days). If the same pace continues, CPI is likely to head lower in the coming months. We expect it to be in the range of 4.2-4.5% In Q4. The only strain emanates from a depreciating INR which might increase the risk of imported inflation. Global commodity prices are largely range-bound however, with ongoing US sanctions against Russia some upheaval in energy prices might be witnessed. This might increase the intermediate input costs," Sabnavis said.

RBI has projected CPI at 4.8% for FY25, with Q4 target at 4.5%. RBI predicts CPI inflation to ease further to 4.6% in Q1 and reach to its main target of 4% in Q2 of FY26. The risks are evenly balanced.