Uncertainty about the inflation outlook is high on RBI’s concern list. However, despite the hawkish tone,the Central Bank has maintained a Q2 inflation estimate of 6.2%. Economists at Kotak believe that there is substantial upside to the RBI MPC’s inflation estimates in the near-term.
Responding to the RBI concerns and their stance, Kotak believes that RBI’s Q2FY24 inflation estimate of 6.2% “oes not seem to have taken into account the massive surprise in the July print of 7.44%”. According to Kotak estimates Q2 inflation is likely to hover around 7.3%.
That said, the Kotak commentary points out that, “Though uncertainty remains from adverse weather events, we expect the spike in the July inflation to be transient, as supply normalizes in the coming months, amid (1) the pick-up in kharif sowing and (2) supply-side government intervention.”
The minutes of the August Monetary Policy meeting indicated RBI’s caution on inflation becoming more generalised though they highlighted the transient nature of the recent food price surge.
Uncertainty on the El Nino occurrence and further intensification of geopolitical conflicts leading to supply-side issues are some of the Committee’s key points of concern. Afterall supply-side intervention is seen as a way to rein in persistent food price shocks.
However, the risk of spikes in other food items remains, even if vegetable prices cool off. “As a base case, we estimate inflation moderating in Q4FY24 to sub-5% levels. We maintain our long-held view of a prolonged pause by the MPC, while keeping a close eye on whether inflation is becoming generalized,” Kotak explained.
So can we expect a rate hike anytime soon? Kotak believes that the RBI will opt for a “prolonged pause by the MPC, while keeping a close eye on whether inflation is becoming generalized.”