India’s retail inflation to exceed 6% until end of 2022, says S&P | The Financial Express

India’s retail inflation to exceed 6% until end of 2022, says S&P

Retail inflation has already exceeded the RBI’s upper tolerance threshold for eight months in a row.

India’s retail inflation to exceed 6% until end of 2022, says S&P
High core inflation would further drive up policy rates, and projected policy interest rates to be 5.90% by the end of this fiscal. (IE)

Global rating agency S&P on Monday maintained its economic growth forecast for India at 7.3% for FY23 and 6.5% for FY24, with “risks tilted to the downside”. It also predicted retail inflation to stay above the central bank’s medium-term target of 2-6% until the end of 2022.

In its latest Economic Outlook for Asia Pacific, the agency said elevated global interest rates will continue to exert pressure on central banks across countries in the form of capital outflows and currency depreciation.

Louis Kuijs, chief economist (Asia Pacific) at S&P Global Ratings said the impact of a pronounced slowdown in China was blunted by a strong rebound in India as consumption, especially of services, continued to gather pace and investment grew rapidly.

S&P economist Vishrut Rana said the rupee may continue to witness volatility, but the country has adequate buffer to absorb the shock of foreign fund outflows.

S&P expects the rupee to be at 78 against the dollar by the end of FY23. However, it forecasts that the currency will reach 79.50 against dollar by end of FY24. However, the rupee will again depreciate to 81 and 82, respectively, by the end of FY25 and FY26.

Also read: RBI MPC likely to raise repo rate 50 bps to tame inflation; may pause rate hike after Dec monetary policy

With the aggressive tightening by the US Federal Reserve resulting in huge capital outflows from several economies, especially the emerging markets, several currencies, including the rupee, have depreciated against the dollar. The domestic currency has shed 9.4% in 2022. On Monday, it hit a fresh low of 81.52 against the greenback. However, the rupee still has performed better than many other currencies. Also, as FE has reported, its depreciation since the Ukraine war has been far less than in earlier crises.

S&P has forecast retail inflation to hit 6.8% in FY23, against 5.5% in the last fiscal, before slowing down to 5% in FY24.

“India headline Consumer Price Inflation (CPI) is likely to remain outside the Reserve Bank of India’s upper tolerance limit of 6% until the end of 2022. That’s amid substantial weather-induced wheat and rice price increases as well as sticky core inflation. And food inflation may rise again,” Kuijs said.

Also read: Crude oil, rate hikes, liquidity key headwinds for Indian economy; US recession may weigh on domestic markets

High core inflation would further drive up policy rates, and projected policy interest rates to be 5.90% by the end of this fiscal. The Reserve Bank of India has already raised the interest rates by 140 basis points this fiscal to 5.4%.

Retail inflation has already exceeded the RBI’s upper tolerance threshold for eight months in a row. It also reversed a declining trend over the past three months and inched up to 7% in August from 6.71% in the previous month.

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