Experts say that the reverse repo rate may be revised by end of fiscal
The country’s annual retail inflation eased to 5.59 per cent in July from 6.26 per cent the previous month, government data released on Thursday showed. Analysts in a Reuters poll had predicted annual inflation at 5.78 per cent.
Aditi Nayar, Chief Economist, ICRA, Gurgaon
“With inflation expected to remain sticky in the five per cent- six per cent range over the next three quarters, it’s increasingly difficult to characterise the pressures as purely transitory in nature.
“We anticipate that the MPC will embark on policy normalisation once domestic demand strengthens and starts dominating inflationary pressures, in place of supply-side issues.
“We foresee a change in the stance to neutral from accommodative in the February 2022 policy review, followed by a hike in the repo rate of 25 bps each in the April 2022 and June 2022 reviews.
“Once the lift-off starts, we believe that the MPC will stagger rate increases over a period of time, instead of immediately trying to push real interest rates back into the positive territory.”
Sakshi Gupta, Senior Economist, HDFC Bank, Gurugram
“Going forward, while inflation readings could moderate further due to a high base effect in September and October, inflation could inch up again to 6 per cent by Q4 FY22.
“The details on inflation readings suggest that inflationary pressures are more broad-based as compared to the likes of the U.S. where they are being led by only a few categories (the re-opening effect).
“This along with the fact that inflation expectations in India are also rising, warrants some caution over the inflation trajectory or reading it as only transitory.”
Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC, Mumbai
“The July CPI print of 5.6 per cent was in line with our expectation and we believe the 6.3 per cent in June should be the peak for a few months, also given base effects in play till November.
“It will be vital to track any sustainable recovery in demand (apart from the pent-up portion) that typically creates price pressures, which are more sticky but responsive to monetary policy unlike supply-side pressures.”
“The path of food prices which are witnessing a mild softening in certain categories of late, sector-specific supply adjustments, services inflation alongside manifestation of pent-up demand, commodity prices and the path of the pandemic will be equally crucial.”
Prithviraj Srinivas, Chief Economist, Axis Capital, Mumbai
“CPI inflation came in lower than our and consensus expectations of 5.8 per cent, mainly due to food inflation coming in lower than expected.
“Prices continue to increase sequentially as firms pass on higher input costs. However, the sequential pace is not as quick as same time last year, which is why in YoY terms we see inflation slowing.
“However, price pass-through could pick up pace in the coming months as the economy opens up even more on the back of vaccinations. Commodity price declines or tax cuts are the only factors that can offset such an outcome. The focus is now on how well the supply side normalises.”
Rupa Rege Nitsure, Group Chief Economist, L&t Financial Holdings, Mumbai
“As expected, the headline CPI inflation has eased to 5.6 per cent in July from 6.3 per cent in the previous two months due to a favourable base effect and a sequential easing in food as well as core inflation.
“This to a great extent reflects a slowdown in demand due to the COVID-19’s second wave. A negative y-o-y growth in consumer non-durable goods despite the favourable statistical base vindicates the claim of demand destruction by the second wave, especially in the rural belts.
“Today’s data points vindicate the RBI’s decision to calibrate the policy normalisation in a gradual fashion.”
Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, Mumbai
“While the prints are expected to remain mostly below six per cent until December, inflation could overshoot again in 4QFY22. With inflation expectations having risen steadily, we expect the MPC to tread more cautiously from the October policy.
“The dilemma will likely increase amidst improving growth prospects as vaccination picks up pace. While we do not expect any aggressive policy normalisation given the uncertainty associated with further COVID-19 cases, the RBI’s room to ignore the inflationary risks is increasingly narrowing.
“Following up on the recently announced liquidity normalisation measures, we expect additional tools (such as higher quantum of 14-day/7-day/overnight VRRR in 3QFY22, MSS, etc.) to shift the overnight rate within the policy corridor before a reverse repo rate hike in December.”
Radhika Rao, Economist, DBS Bank, Singapore
“July inflation eased to 5.6 per cent y/y, matching our forecast. Core inflation was also slightly lower at 5.9 per cent vs 6.1 per cent in June. Apart from base effects, food inflation moderated on lower perishables and pulses, helped also by administrative changes i.e. import duty cuts.
“Looking ahead, there are latent pressure points to keep an eye on, as inflationary expectations firmed up in the latest survey. As states ease restrictions, there is likely to be a shift away from goods to services-led inflation, with firmer demand to also encourage producers to increasingly pass higher input prices.
“Base effects and seasonality are likely to see inflation moderate over the next three-four months before firming up again in the March 22 quarter.”
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, Mumbai
“CPI inflation at 5.6 per cent is in line with expectations. While a favourable base effect played its part, the sequential momentum for food items was also lower than the past couple of months. Core inflation also dipped to 5.9 per cent though the print is marginally higher than expected.
“We believe that inflation will continue to glide lower for most of the calendar year. The July print will provide the RBI some comfort to maintain its accommodative stance to support growth even as it continues to calibrate liquidity.”
Garima Kapoor, Economist – Institutional Equities, Elara Capital, Mumbai
“The normalisation of supply chains following gradual unlocking of economic activities and removal of import restrictions for some food items such as pulses helped to limit food price rise in July. High base effect also supported across the board moderation with CPI coming perfectly in line with our estimate.
“While today’s print provides some breather to policy makers with inflation falling back within the target band, the expected trajectory of inflation is likely to compel the RBI to normalise policy towards the end of FY22. We expect the reverse repo to be hiked in Q4FY22.”
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