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Inflation may fall below 6 pc by Q4, ease pressure on RBI for prolonged rate hike

Consumer price index eased to 7.01% in June, marginally lower than the 7.04% in May

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Is the retail inflation cooling? Consumer price index (CPI) inflation in June came in at 7.01 per cent, marginally lower than the 7.04 per cent in May. Some economists now see inflation trending closer to 7 per cent or even slightly lower in July. Globally, crude oil, metal, cooking oil and other commodity prices, which were on the boil, have seen some correction off-late, which should help big importers like India. The Reserve Bank of India will be clearly watchful of the evolving dynamics. 

Most economists still expect the central bank to raise the benchmark repo rate in the next couple of monetary policy committee meetings at least. However,  one may then see a long pause, as it will want to see how the growth dynamics pan out too. 

To be sure, retail inflation still remains elevated; June was the sixth consecutive month that it has traded above RBI’s upper end of the 2 per cent to 6 per cent range It is expected to moderate gradually and likely come down below 6 per cent by the Jan-March quarter. 

Prices of fruits, pulses, oils etc. have moderated domestically and a global easing in food prices should help further. But, vegetable prices have continued to rise and how the monsoon pans out will also be closely eyed on the trend going ahead. On the other hand, demand could drive inflation higher in the services sector, point analysts.

“With commodity prices having eased sharply on the back of a feared global recession, and the decline in vegetable and edible oil prices, the Indian retail inflation prints should soften below 7 per cent in the coming months. However, the sequential momentum in services inflation remains a key monitorable, as high domestic demand is likely to create upward pressure on prices for this sector,” said Aditi Nayar, chief economist at ratings agency ICRA. 

Others like Madhavi Arora, lead economist at Emkay Global Financial Services, also say signs of easing have begun to appear.

“We are currently tracking July inflation at 6.7-6.8 per cent, with the second quarter print at 7-7.1 per cent - lower than the RBI’s forecast of 7.4 per cent,” said Arora.

Kotak Mahindra Bank economists Upasna Bhardwaj and Suvodeep Rakshit say inflation peaked out in April, but will remain sticky around 7 per cent in the near-term.

“The recent moderation in commodity prices led by recessionary concerns provides some relief, but the weakening rupee is expected to limit the cheer,” the economists said.

Giving a speech in Delhi recently, RBI Governor Shaktikanta Das said that with the supply outlook appearing favourable, several high frequency indicators pointing to resilence of the recovery in the April-June quarter, the inflation may ease gradually in the second half of the financial year, precluding chances of a hard landing in India.

The MPC next meets in August. Economists still expect it to raise the repo rate further in the 25-50 basis points range. It will be followed up by another hike, but may then pause.

“The current picture of inflation raises hopes of a gradual moderation going forward with Q1 average CPI inflation already lower than RBI’s forecast by 20 bps. This has the potential to slow down the pace of rate hikes in the current year,” said Suman Chowdhury, chief analytical officer at Acuite Ratings and Research.

ICRA’s Nayar sees rates being raised 60 bps over the next two MPC meets. But, that will be “followed by an extended pause, as the MPC will focus on containing inflationary expectations without sacrificing growth,” she said.

“FY23 could see rates go up by 75 bps+, with the RBI now showing its intent to keep real rates neutral or higher. However, the front-loaded rate hike cycle does not imply a lengthy tightening cycle, and once they reach the supposed neutral pre-Covid monetary conditions, the bar for further tightening may go higher incrementally amid increasing growth and inflation trade-offs,” said Arora of Emkay.

The Kotak economists see 85 bps in further repo rate hike and then pause in February meeting to see the impact of monetary tightening as inflation would have moderated below 6 per cent. 

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