In June, retail inflation reached its highest level in three months, standing at 4.81%. This increase can be attributed to the rising prices of vegetables and exceeds the economists’ expected range of 4.3 to 4.6%. While most economists anticipate that the inflation rate will remain high, they do not believe it will lead the Reserve Bank of India (RBI) to implement another interest rate hike.
Simultaneously, the Consumer Food Price Index (CFPI) experienced a significant surge, reaching 4.49% in June compared to 2.91% in May. Economists widely predicted this outcome due to a delayed onset of monsoon and untimely rainfall in various parts of the country.
Here is economists’ take on the latest inflation reading:
Aurodeep Nandi and Sonal Varma, Nomura
As the sharp and unusual increase in vegetable prices persists into July, inflation for the month is expected to approach the 6% mark if the current trends persist. Furthermore, inflation levels are anticipated to remain similarly elevated in August. However, despite this significant surge in vegetable prices, we believe that the overall stance of the RBI to maintain its policy pause will remain unchanged.
Nevertheless, the prolonged presence of elevated headline inflation, combined with the RBI’s recent emphasis on a stricter inflation target of 4% and the Federal Reserve’s persistent hawkishness, limits the flexibility of the RBI to respond to challenges in economic growth swiftly. Consequently, any unfavourable shifts in short-term inflation trends could potentially delay the implementation of the first interest rate cut.
Abheek Barua, Chief Economist, HDFC Bank
As the impact of the high base effect from the previous year diminishes and food prices continue to face upward pressure, headline inflation is anticipated to exceed 5% in July 2023. Considering the emerging risks associated with weather conditions, our inflation forecast for FY24 has been revised to 5.1%, compared to the previous estimate of 4.9%. Additionally, the average for Q2 is projected to be 5.3%, while Q3 is expected to reach 5.6%.
Our forecasts indicate that the balance of risks leans towards the upside, considering that the progress of sowing is weaker compared to last year, and the distribution of monsoons remains uneven. In light of these factors, it is anticipated that the RBI will maintain an elevated interest rate of 6.5% throughout FY24, and we project that rate cuts will likely be implemented only in early FY25.
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank
Vegetables, pulses, and protein-rich food items primarily drive the unexpected surge in inflation. Due to weather-related disruptions, prices of perishable food items are anticipated to remain elevated in the near future. If these disruptions persist, it could potentially lead to an upward impact of 20-25 basis points on our average estimate of 5.1% for FY24. The RBI is expected to exercise caution in response to these supply-side shocks. Still, we maintain our expectation of the central bank maintaining a pause on interest rates throughout the year.
Dharmakirti Joshi, Chief Economist, CRISIL
We think that disruptions in the monsoon season and already elevated inflation rates for certain commodities contribute to upward pressure on the inflation outlook.
The months of July and August hold great significance for the agricultural sector, and we will closely monitor the progress of the rains during this period. Similar to previous instances, fiscal policy interventions may be implemented through measures to stabilise prices. These interventions could involve releasing stocks, facilitating imports, or imposing restrictions on hoarding to curb abnormal price spikes.
Rajani Sinha, Chief Economist, CareEdge
The proportion of food inflation within the headline inflation has increased to 44%, up from 36% in the previous month. While some of the rise in food prices can be attributed to seasonal factors, certain items like vegetables have experienced price increases that surpass the typical seasonal patterns observed in previous years.
The Central Bank will express concerns over the high inflation rates observed in essential food items such as rice, pulses, vegetables, and milk, as these increases can hurt household inflation expectations. The progress of the monsoon in July will be particularly important in assessing the situation.
If the distribution of rainfall across different regions remains uneven, it could potentially have a detrimental effect on the sowing of Kharif crops and further exacerbate the issue of food inflation in the future.
Debopam Chaudhuri, Chief Economist, Piramal Enterprises Limited
I believe RBI is aware of the seasonal nature of these price movements and will not deviate too much from its envisioned path regarding policy rates.
According to the economists surveyed in the RBI’s Survey of Professional Forecasters, there is an expectation that retail inflation may increase once again, potentially reaching 5.3% in Q3 of FY24. However, inflation will persist at around 4.75% during Q2 and Q3. Additionally, I believe the slowdown in economic activity should prompt the RBI to take proactive measures and lower interest rates by December 2023, deviating from the expected timeline.
According to my perspective, despite the projected inflationary pressures, the need to stimulate economic growth could prompt the RBI to take preemptive action by reducing interest rates earlier than anticipated.
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