The recent easing of global commodity prices, especially of crude oil, has added to optimism that retail inflation may drop below 6%, or the upper band of the central bank’s medium-term target of 2-6%, sooner than anticipated. While the central bank has forecast inflation based on the consumer price index (CPI) to drop below 6% only in the fourth quarter of FY23, some analysts expect it to flirt with that level in the third quarter itself.
Economists, however, are less sanguine about the overall retail inflation scenario. The continued pass-through of elevated input rates pose sustained upside risks to output price inflation. Moreover, oil-marketing companies, which were forced to hold on to rates earlier, are unlikely to reduce petrol and diesel rates in sync with the drop in global crude oil prices, to recoup losses, they added.
As such, prices once raised at the retail level, show downward rigidity, according to them. Even in case of edible oil, companies are now asked to reduce retail prices by Rs 10-15 per litre, only a fraction of what they hiked over the past one year.
The Bloomberg Commodity Index dropped more than 14% over the past one month, as investors remained concerned about a potential recession-driven demand downturn. Brent crude oil futures dropped 4.1% last week and settled at $107.02 per barrel on Friday.
The central bank last month raised its inflation projection for FY23 to 6.7% from 5.7% earlier. It had said inflation could stay above 6% in the first three quarters of this fiscal—7.5% in Q1, 7.4% in Q2 and 6.2% in Q3 and 5.8% in Q4.
On Saturday, RBI governor Shaktikanta Das exuded confidence that inflation would start easing gradually from the second half of this fiscal.
Retail inflation dropped to 7.04% in May from an eight-year high of 7.79% in the previous month. It still breached the central bank’s tolerance level for a fifth straight month.
Indranil Pan, chief economist at Yes Bank, expected monthly inflation to drop below 6% either towards the fag end of the third quarter or in the first month of the fourth quarter. “The divergence in the Wholesale Price Index (WPI) and the CPI has consistently remained high, implying that manufacturers have anyways not been passing on 100% of the input cost increase to end users. Hence any benefit from the input cost side could be used by firms to neutralise the earlier hits on the balance sheets,” Pan said.
As for food supplies, good monsoon and government actions (such as wheat export ban and reduction in customs duty on edible oil) will help, Pan added.
ICRA chief economist Aditi Nayar said the fall in commodity prices should start feeding through to output prices and the CPI inflation over the next couple of prints. “Although crude oil prices have receded, pump prices of petrol and diesel are highly unlikely to fall imminently. In our view, the CPI inflation may dip below 6% only in the third quarter of FY23.”
Aurodeep Nandi, India Economist at Nomura, presented a less optimistic outlook. “While the recent correction in global commodity prices is likely to have an ameliorating impact, it will be reflected in lags. Meanwhile upside risks persist from the continued pass-through of higher input costs, services reopening pressures, pending electricity tariff revisions and elevated inflationary expectations.” Consequently, Nandy expected inflation to remain sticky and fall below 6% only by the June quarter of next year.
Arguing that retail inflation may not dip in sync with the global commodity price fall, Madan Sabnavis, chief economist at Bank of Baroda, said manufacturers and service providers are still in the process of passing on higher input costs. “One round was done in H2-FY22 and the second one would be any time round. Most input costs, such as power, fuel, food prices (edible oils), chemicals, freight, etc.” Also, maximum retail prices, once raised, are usually not lowered to the extent, he added.