‘India inflation on downward trend but still far above RBI tolerance; Next rate hike may be less aggressive’

Inflation in India is seen on a downward trend going forward, albeit the Reserve Bank of India’s comfort zone is still far from reach, said Sujan Hajra, Chief Economist, Anand Rathi Securities. In an interview with Lalit Kumar of FinancialExpress.com, Hajra said that one can expect a favourable base for food inflation, which is currently the biggest driver of consumer-based inflation in India. Having said that, the inflation will be outside the RBI’s comfort zone till early 2023, before ticking down to under 6 per cent by March. He also weighed on the US inflation print for October and said that the ease-off came by as a surprise, and credited the softening of global commodity prices, as well as the base effect for the inflation coming in at 7.7 per cent for the previous month.

After the inflation rate touched a five-month high of 7.41 per cent in September, how do you see the path forward for CPI inflation, the latest data for which is due on November 14?

The inflation dynamics in India has changed significantly in the recent months. Previously, inflation was being driven by global factors. For instance, if you look at the food inflation, the category leading the inflation was edible oil and pulses, both of which are imported by India. Now, the food inflation is being led by vegetables and cereals which are totally domestic oriented. All in all, food is the biggest driver of inflation currently. Going forward, we can expect a favourable base for food inflation, which is the largest component in the inflation data. In my opinion, India’s inflation will be on a downward trend, which will continue further. But until early 2023, inflation will be outside RBI’s comfort zone of under 6 per cent. Coming close to 4 per cent in March next year is not entirely off the table as well.

The previous RBI’s Monetary Policy Committee (MPC) meeting revealed the dominating outlook as ‘hawkish’. What do you think will be the scenario in the next meeting in December?

The latest RBI minutes revealed that two of the members were dovish, two were fence-sitters, while two were hawkish. In the upcoming meet, an argument for a rate pause, at least for one policy, will be the dominant view. Going forward, hikes won’t be as aggressive as 50 bps (basis points), rather it will be lower than that, maybe falling in the range of 25-35 bps.

What are your views on the US inflation rate for October? Accordingly, what do you think will be the next move for the US Federal Reserve?

The US inflation print for October came in better than expected. There already was indication that the inflation will be easing but obviously the extent of easing has been more than expected. A big factor playing in this easing of the inflation rate is the softening of global commodity prices, with perhaps a slight exception of oil. Having said that, it still remains pretty elevated and will take a long time before it comes into the Fed’s comfort zone. With the latest inflation print, it is very unlikely that it will be another 75 bps. One can be certain that the rate hike will be 50 bps or lower.

Was the ease off in the US inflation rate a one-time wonder or an indicator of the onset of a downward trend? Are there any reversing factors, in case the inflation is set to cool-off?

Globally, there is a significant amount of demand compression, which is particularly apparent in China, a nation that is the biggest commodity importer. That should maintain a downward pressure on the global commodity prices. According to me, both the base effect as well as the softening of commodity prices should keep the inflation in a downward trend. However, it is more of a longer term view rather than transitory. On the reversing front, oil obviously is the biggest factor. Through a cascading effect, the oil prices feed into almost everything. Further escalation of war can also play a role in the reversal of this trend.

Who is taking the most heat from the prolonged inflationary pressures in India?

Amid elevated inflationary levels, the biggest slowdown can be seen in the industrial sector, particularly manufacturing. A major reason for the same is that manufacturing is more export-oriented and the global demand is coming off.