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Geopolitical tensions, high pump and raw material prices may keep inflation above RBI’s comfort zone this year

Economists said even though inflation may have peaked in April, it will continue to remain hot at about 6.5 per cent in FY 2023.

Inflation, petrol disel price
On Monday, government data showed retail inflation eased to 7.04 per cent in May from an 8-year high of 7.79 per cent in April.

As Ukraine and Russia tensions continue to loom, leading to high commodity prices and increased raw material costs, the impact of the geopolitical crisis will continue to spiral into the domestic market and keep domestic inflation elevated throughout this year, experts said. High crude oil prices will keep domestic pump prices elevated even though government intervention in the form of excise duty cuts may help ease off some pressure. This means Consumer price index (CPI) inflation will likely remain above the Reserve Bank of India’s (RBI) comfort zone throughout the year, they added.

On Monday, government data showed retail inflation eased to 7.04 per cent in May from an 8-year high of 7.79 per cent in April, as price pressure across core and food products moderated, partly aided by a conducive base. Inflation based on the CPI still breached the upper band of the RBI’s medium-term target of 2-6 per cent for a fifth straight month.

Economists said even though inflation may have peaked in April, it will continue to remain hot at about 6.5 per cent in FY 2023. According to the recent RBI projections, CPI inflation is expected to remain 6.7 per cent this year, assuming that crude oil prices remain at $105 per barrel on an average. Some economists expect inflation to spike above RBI’s projections on the back of unrelenting crude oil prices. The central bank, which raised interest rates by 50 basis points (bps) in June MPC meeting, has not taken into account the impact of policy rate hikes in its forecast.

Inflation likely to be lower than RBI’s projections in Q1 but higher in FY 2023: Motilal Oswal

“We expect inflation at 7.3 per cent YoY in Q1 FY 2023, lower than the RBI’s forecast of 7.5 per cent. At the same time, we expect headline inflation ~6.5 per cent in 4Q FY23 (with 6per cent YoY inflation in Mar’23), much higher than 5.8per cent projected by the RBI. While our 1H FY23 inflation forecast is lower than that of RBI, our FY 2023 forecast is ~7per cent higher than RBI’s projection of 6.7per cent. Although the RBI sounded hawkish, the current numbers provide a reason to be more patient and less aggressive in its rate hikes. We suggest that the RBI pause in August to allow the market to absorb the steep hikes (of 130 bps) in the past two months. Nevertheless, a 25 bps rate hike is not off the table yet.”

Inflation to remain elevated through 3Q FY23; frontloaded policy tightening to continue: Kotak Institutional Equities

“Even as we expect inflation to have peaked in April, the descent to the sub-6 per cent range will be slow with readings till November 2022 likely to remain above 6 per cent. We maintain our FY 2023 (estimated) estimate for average CPI inflation at 6.5 per cent. Upside risks to inflation remain from persistence of geopolitical tensions, direct and indirect impact of elevated global commodity prices, especially crude oil prices, and risks of further pass-through to domestic pump prices despite recent excise duty cuts, and rising raw material prices along with a weakening INR.” Kotak Institutional Equities said it continues to expect front-loaded rate hikes from the RBI. It pencils in further repo rate hikes of 85 bps in the rest of FY 2023 (including 35 bps hike in the August policy) and a CRR hike of 50 bps by end-FY 2023. 

Inflation may settle at 6.5per cent this year if crude remains $111/bbl and monsoon is normal: Barclays

“Accounting for the continued surge in domestic food prices, and sustained rise in international commodity prices, we revise our inflation forecasts higher. We now see inflation averaging 6.5 per cent in FY 2023, up from 5.8 per cent previously. This is still lower than the central bank’s 6.7 per cent projection made in the June policy review last week. Our latest projection factors in global crude oil prices of USD111/bbl (higher than the RBI’s USD105/bbl assessment), a normal monsoon and higher cyclical food prices.” … “Accounting for the available high-frequency prices and today’s data, we are currently tracking June CPI at 6.8 per cent YoY. We expect the monetary policy committee to remain committed to tightening financial conditions, and see a terminal rate in the current rate hiking cycle at 5.75 per cent, to be achieved by December 2022.”

Risk of wage-price spiral amid employment situation which would make the task of reining in inflation more difficult: CareEdge

“For the next few months, we expect CPI inflation to remain above RBI’s upper tolerance limit owing to elevated crude and commodity prices. Also, with expected improvement in the employment situation, there is a risk of wage-price spiral setting in, which would make the task of reining in inflation even more difficult. In the second half of the fiscal, we could see some cooling of price pressures owing to control measures taken by RBI and the government. Robust Kharif output helped by a conducive monsoon could ease food prices to a certain extent.” … “A likely slowdown in the global economy will also limit the upside to inflation. Considering all these factors, we estimate the CPI inflation to average around 6.5per cent in FY23, with an upward bias. The protracted war situation and the resultant high crude oil prices pose an upside risk to our inflation expectations.”

Inflation expected to be 6.7per cent in FY 2023; pass through of fuel prices, trajectory of global crude oil prices pose risk: HDFC Bank Treasury Research

“Going forward we expect inflation to average at 7.2 per cent in H1 FY 2023 and ease to 6.3 per cent in H2 FY 2023 assuming crude oil prices at $105 per bbl in FY 2023. For FY 2023, we expect CPI to average at 6.7 per cent, assuming a normal monsoon, some moderation in commodity prices in H2 and elevated services inflation.” … “Our forecast also considers recently announced excise duty cuts on petrol and diesel, although we assumed that these could be partially offset by some pass through of high crude oil prices by Oil Marketing Companies (OMCs) to cover up their under-recoveries. It must be emphasised that the extent of this pass through alongwith trajectory of crude prices does provide upside risks to our inflation trajectory, especially given that global oil prices seem relentless.”

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