Hardening global crude prices together with rupee depreciation suggest retail inflation is likely to remain elevated. The base effect also contributed to the May number.
Economists expect the Reserve Bank of India (RBI) to continue to tighten monetary policy to rein in prices. “We maintain our view that the MPC (monetary policy committee) will increase the policy rate by 35 bps and 25 bps, respectively, in the next two policy reviews, followed by a pause,” said
chief economist Aditi Nayar.
The RBI raised the key repo rate by half a percentage point last week, pegging inflation in FY23 at 6.7%. The next policy review is scheduled for August 2-4. Inflation based on the Consumer Price Index (CPI) was 7.79% in April, an eight-year high, and 6.3% in May 2021. “We are expecting that RBI could factor in a rate hike in August, as inflation in June is likely to come above 7%, and even in the October policy, and take it higher than pre-pandemic level by October to 5.5%,” said group chief economic advisor Soumya Kanti Ghosh.
Outlook
Sequentially, retail inflation accelerated 0.94% in May over April with all six major subcomponents rising over the month before. Food inflation was marginally lower in May at 7.97% compared with 8.31% in April but month-on-month the relevant index was up 1.6%. Inflation in vegetables was 18.26% year-on-year and sequentially 5% higher than that in April. Fuel and light inflation was 9.54% in May with a sequential rise of 1.4%.
Economists expect inflation to remain elevated over the next few months with the waning base effect giving it a statistical lift.
Crude prices have risen about $10 a barrel since the government cut excise duty on fuel. Inflation will accelerate further if oil companies pass on this increase.
“The double whammy of the rise in the crude oil price and the rupee depreciation poses upside risks to the June 2022 CPI inflation print, even as the lower-than-expected momentum in the services inflation in May provides some relief,” Nayar said.
CareEdge chief economist Rajani Sinha said, “With expected improvement in employment situation, there is a risk of wage-price spiral setting in. That would make the task of reining in inflation even more difficult.”
Some cooling of price pressures is expected in the second half of the fiscal year owing to measures taken by the RBI and the government. A good monsoon could help cool food prices if rains are above normal as forecast.
Economists expect inflation to remain in the 6.75-7% range in June. “The best thing is that the peak of inflation may have been reached at 7.8%, with a little bit of luck,” said Ghosh.
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