Retail inflation is likely to cross the 6 per cent level over next two months but will ease thereafter as food prices abate and the base effect normalises, says a report.
According to global financial services major HSBC, the inflation based on Consumer Price Index is expected to cross the 6 per cent year-on-year mark over the next two months, and would ease to 5 per cent from September onwards.
“We expect headline CPI inflation to cross the 6 per cent y-o-y mark over the next two months, thanks to a low base from last year. However, inflation is likely to take a turn towards RBI’s target of 5 per cent from September onwards as food prices abate (if rains pick up) and the base normalises,” HSBC said in a research note.
“We remain skeptical whether softening in core prices will continue”, it said, adding that margin pressures faced by firms could eventually make their way to inflation if they decide to pass on higher input prices.
On monsoon and its impact on inflation, HSBC said the good news here is that rains have improved from an 11 per cent deficit in June to a 1 per cent surplus in early July. “Rains over the rest of July will be critical in determining the trajectory of food inflation,” it added.
HSBC said an action-packed July will determine the future trajectory of several variables.
“The rest of July is likely to be action-packed, with a slew of events and data (announcement of the new RBI governor, Parliament session, rains) that will impact the economy for a long time to come,” it said.
In the last monetary policy review in June, RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.
The industry is still hopeful of further rate reduction from the central bank to boost investment.