Inflation to hover above RBI’s comfort level in coming months; MPC may raise repo rate to 6% by year-end

India’s retail inflation dropped to a five-month low of 6.71% in July, offering some respite to fiscal and monetary authorities as they strive hard to check scorching price rise, while ensuring growth is not hurt.

Inflation to hover above RBI’s comfort level in coming months; MPC may raise repo rate to 6% by year-end
According to economists, while peak inflation seems to be behind us, it may hover just above RBI’s upper tolerance band of 6% for a few more months.

India’s retail inflation dropped to a five-month low of 6.71% in July, offering some respite to fiscal and monetary authorities as they strive hard to check scorching price rise, while ensuring growth is not hurt. A fall in global commodity prices and the resultant taming of imported inflation contributed to the easing of price pressures. Even with the moderation in the previous month, inflation continues to remain above the Reserve Bank of India’s medium-term target of 2-6% for a seventh straight month. According to economists, while peak inflation seems to be behind us, it may hover just above RBI’s upper tolerance band of 6% for a few more months. The RBI is likely to raise the repo rate to 6% by 2022-end, followed by a pause and a shift to neutral policy stance, they added.

Easing crude, commodity prices to further soften inflation; India’s growth trajectory to improve

“India’s headline inflation softened to 6.7% in July primarily due to softening of food prices. The increase in fuel inflation despite government measures to curb domestic petrol and diesel prices taken a few months ago, is a concerning factor. Currently, the global crude and commodity prices have corrected, this should further soften inflation in India in the coming months. However, rupee depreciation which increases the import costs and the fall in crop yields due to uneven monsoon this year poses near term risk to inflation in India,” said Vivek Rathi, Director-Research, Knight Frank India.

He added, “Industrial production (IP) softened in June primarily due to seasonal slowdown in mining output owing to the monsoon. There has been a marginal slowdown in output in almost all the segments including manufacturing. However, the consumer goods and consumer durables output has sequentially picked depicting improving demand conditions in the economy. Currently, while the key developing economies are hinting at a recession, India’s economic fundamentals are continuing to remain strong. Going forward, India’s growth trajectory is more likely to improve as the capacity utilization levels are improving which could boost investments.”

Also Read: Food & beverages inflation softens to 6.71% in July on improved supplies

Expect Repo rate at 6% year-end, followed by a pause and shift to neutral policy stance

“CPI headline inflation for July has moderated inline with our expectations led largely by food inflation while the core inflation remains elevated and sticky. The coming few readings are expected to be a tad above 7% with inflation likely to hover above RBIs upper threshold limit of 6% until January 2023. We expect Repo rate at 6% by end of 2022 followed by a pause and a shift to neutral policy stance, ” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

Inflation not likely worsen from current levels

“The peak inflation seems to be behind us as near-term upside risks to prices have been on a decline. Commodity prices continue to shed the highs recorded in the first half of the year. The international price of crude has come down to $90 a barrel from close to $140 a barrel. However, the CPI may continue to hover just above RBI’s upper tolerance band of 6% for a few more months. The low base effect of food and fuel will keep the inflation number elevated from next month. In addition, sustained weakness in the rupee may dull the effectiveness of government efforts to tame consumer price rises. But the good news is inflation is most likely not going to worsen from the current levels,” said Ritika Chhabra, Economist and Quant Analyst, Prabhudas Lilladher.

MPC may hike interest rate by 10-35 bps in September meeting

“Given the base effects, we caution that the next two CPI inflation prints could rise slightly from the 6.7% seen in July 2022, in spite of which we believe that the average inflation for the ongoing quarter will modestly trail the MPC’s projection of 7.1%. Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peaks seen in mid-June 2022, which bodes well for easing domestic input cost pressures and the core-CPI inflation in the next few months,” said Aditi Nayar, Chief Economist, ICRA.

Also Read: Trade deficit nearly triples to $30 billion in July

“Given the MPC’s focus on anchoring inflation expectations and the RBI Governor’s statement on inflation moving closer to the target of 4.0% over the medium term, we expect another rate hike of ~10-35 bps in the September 2022 policy meeting. Thereafter, we believe the MPC is likely to be extremely data dependent. If the downtrend in commodity prices sustains, we expect the first sub-6% print to emerge by the middle of Q3 FY2023, which may prompt a pause to reassess the robustness of growth,” she added.

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