India's retail inflation saw an uptick last month due to higher food prices, denting hopes that a gradual decline in inflation prints will slow the pace of aggressive rate hikes.
Measured by the consumer price index (CPI), India's retail inflation in August jumped to 7%, compared to 6.71% in July.
Food inflation, which accounts for nearly half the CPI basket, soared 7.62% in August 2022 as against 6.75% in July, according to the data released by the National Statistical Office on Monday.
The number still remains above the RBI's tolerance zone of 2-6% for the eighth consecutive month. Analysts feel the RBI may be compelled to lift rates more aggressively in the upcoming MPC meets to bring down elevated inflation.
On the other hand, industrial growth, as measured by the Index of Industrial Production (IIP), slumped to 2.4% in July against 12.3% in June.
It's kind of a double whammy situation for the Indian economy where growth is faltering and inflation is rising. Here's what experts, analysts and brokerage firms have to say on the CPI and IIP prints.
Rating firm: CARE Ratings
While globally commodity prices are on a downward trend, volatility in food prices, which has a major share in the CPI basket, continues to pose an upside risk to domestic inflation.
Furthermore, a reduction in global crude oil prices is unlikely to translate into an immediate decline in domestic oil prices as oil companies would want to recoup their losses.
Also, improving discretionary demand especially in the services sector could keep core inflation sticky in the near term.
"We expect inflation in Q2 to average around 7%, slightly lower than RBI’s projection of 7.1%. The arrival of the Kharif harvest in October-November in markets could help alleviate food inflation and this will be reflected in the average inflation print for Q3 and Q4.
With inflation remaining high, we expect RBI to continue with rate hikes. We expect RBI to hike the rate by 25-50 bps in the upcoming meeting," said CARE.
Though the IIP showed improvement over the pre-pandemic period, the progress is yet to be broad-based.
The weakness in the manufacturing and consumer goods segment appears concerning.
Going ahead, the consumption impulses in the economy could improve with the commencement of the festive season. However, elevated domestic inflation, volatility in commodity prices and global growth slowdown could be the major challenges to the momentum in industrial activity.
Brokerage firm: BofA Securities
"We have been arguing that a sub-7% CPI inflation print would have offered the RBI MPC some comfort to consider a more measured hike on Sep 30th. August CPI inflation outturn doesn't pose any upside risks to the full year CPI inflation trajectory but doesn't offer much comfort either," said BofA Securities.
"On the other hand, activity indicators seem to be losing momentum as highlighted by the IIP data. This naturally deepens the dilemma for RBI MPC. Our US and Euro area economists have recently upped their upcoming and terminal rate estimates and that makes the next move by the RBI MPC a rather close call b/w a 25-35bp hike."
Brokerage firm: Motilal Oswal
With the actual IIP data for Jul’22, the brokerage firm's in-house indicators for real GVA growth stand broadly unchanged at 7.2% year-on-year (YoY) in July 2022 (from 7.3% YoY estimated earlier). Motilal Oswal continues to expect a 5-5.5% YoY growth in real GDP in Q2FY23.
A combination of inline inflation and lower-than-expected IIP is not ideal, but it is unlikely to change anything for policymakers, said the brokerage.
The brokerage expects the RBI to hike policy rates by another 50-60bp in the remainder (four months) of 2022, with a 25-35bp hike at its September 2022 monetary policy meeting. This would take the repo rate to 6% by December 2022.
Brokerage firm: Nirmal Bang
With CPI inflation still hovering at 7%, Nirmal Bang expects the RBI to hike rates by a final 35bps at its policy meeting later this month.
However, the brokerage firm maintains its FY23 CPI forecast at 6.2% and sees downside risks to the RBI’s 6.7% forecast, especially with the moderation in crude oil prices.
Despite the disappointment in IIP, most high-frequency indicators are still holding up well, which will give the RBI enough comfort to proceed with the final rate hike, it said.
Analyst: Madhavi Arora, Lead – Economist, Emkay Global Financial Services
While the RBI is still far from its supposed neutral rate, the analyst believes India is near the peak of RBI’s hawkishness, led by falling risk premia of the entire commodity price complex. However, the global situation is still fluid and macro assessments might still require frequent adjustments ahead from a policy perspective.
"We are currently tracking September inflation at 7.14%, with Q2FY23E print at 6.94% - lower than the RBI's forecast of 7.1%. This is, however, unlikely to derail the RBI's tightening path as inflation still remains elevated," said Arora.
"We maintain our FY23 CPI estimate of 6.5% with a downward bias (RBI: 6.7%). FY23 could see rates go up by a maximum of 50bps, with the central bank showing its intent to keep real rates near its estimated natural rate. The break-up of the remainder rate hike could be frontloaded or split for the rest of CY22," said Arora.
Analyst: Sunil Kumar Sinha, Principal Economist, India Ratings and Research (Ind-Ra)
Ind-Ra does not see retail inflation coming closer to RBI’s target of 4% any time soon. The outlook continues to be uncertain due to: i) cereal inflation ii) weakness in the currency, (iii) elevated global commodity prices iv) pick-up in services demand and v) revision of natural gas prices in the second half of FY23 (H2FY23) (due in October 2022).
Ind-Ra, therefore, believes in line with the major central banks across the world, RBI will continue to follow a tighter monetary policy regime and another 25-50bp hike in policy rates is expected in FY23. However, the timing of these hikes will be data-dependent.
Ind-Ra has been pointing out that a rebound of the consumer non-durable segment is critical for a sustained and broad-based industrial recovery. Going forward, the recovery in this segment looks challenging due to the squeezing of the purchasing power of the households as wage growth is lagging behind inflation.
The high-frequency indicators are giving a mixed signal. While the coal production in August 2022 was up 8.3% YoY, the power generation was up only 3.1% YoY. All in all, Ind Ra expects the factory output to have a YoY growth in the low to mid-single digits in August 2022.
Analyst: Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research
While the depreciation of the rupee has raised the risks of imported inflation, some steps taken by the government such as higher crude imports at a discount from Russia have partly helped to address such risks.
"We believe that the incremental pressures on CPI inflation should be moderate unless there are surprises in the Kharif crop output," said Chowdhury.
"Nevertheless, the current inflation levels are high for the comfort of MPC which is looking to pare them down below 6.0% by Q3FY23. We, therefore, expect a further rate hike of around 50 bps by RBI in the next MPC meet,” Chowdhury said.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.
