The Consumer Price Index (CPI) inflation numbers, which rose to 6.52% in January on the back of higher food prices, may compel the Reserve Bank of India (RBI) to raise interest rates in the next Monetary Policy Committee (MPC) scheduled in April, believes brokerages.
"We expect CPI to move lower through FY24 led by softer global commodity prices and domestic demand cooling off. For now though, CPI remains discomfortingly high from the RBI’s standpoint, and we expect another rate hike at the next MPC review," said brokerage Nuvama Wealth Management Ltd in its report.
CPI inflation came in at 6.52% compared to forecasts from Bloomberg consensus at 6% and brokerage Nirmal Bang Institutional Equities Research at 5.94%. From 6.05% in December 2022, the CPI rural inflation rate increased to 6.85% in January 2023. From 5.39% in December 2022, CPI urban inflation increased to 6% in January 2023.
Since interest rates are the primary tool used by central banks to control inflation, they often move in the same direction as inflation.
On February 8, the MPC of RBI hiked the repo rate by 25 basis points to 6.50%. This came on the backdrop of retail inflation falling under the RBI’s threshold of 6% for three consecutive months and the US Fed's easing the pace of increase in its benchmark interest rate.
According to Nirmal Bang Institutional Equities Research, CPI inflation rose to 6.52% in January 2023 from 5.72% in December 22. The rise in inflation was mainly on account of food & beverage inflation, which rose from 4.6% in December to 6.2% in January. Vegetable prices declined by 3.8% month-on-month (MoM) in January.
"Cereal prices were up by 2.6% MoM against our estimate of 1.2% MoM led by higher prices of wheat and related products, rice and other cereals, which offset a sharp 21.6% MoM decline in PDS Rice prices and 4.93% MoM decline in Public Distribution System (PDS) Wheat," said the brokerage in its report.
As a result of the PM Garib Kalyan Anna Yojana and the National Food Security Mission, PDS grain prices decreased as distribution became free of charge. On account of seasonal increases in local demand and export demand, egg prices have also continued to grow, while milk prices have somewhat increased due to higher input costs. Prices for meat and fish were also just a little bit higher than the brokerage anticipated. While prices for Oils & Fats continued to decline, spice prices increased 1.6% MoM, maintaining the upward trend witnessed over the previous few months. Fuel and light inflation was unchanged on a monthly basis and increased by 10.8% annually.
In its report, Nuvama Wealth Management noted that, generally, inflation excluding vegetables has increased significantly recently, mostly as a result of higher food prices and elevated and persistent core inflation. The sudden increase in price is undoubtedly alarming on the food front. However, we believe that once the rupee (INR) stabilises in H2FY24, the recent decrease in food prices around the world should contribute to reduced domestic food prices as well. For the time being, the existing substantial current account deficit and high core inflation could lead to more RBI tightening.
"However, the ongoing RBI tightening, expected fiscal consolidation and slowing global growth would work to slow down the domestic economy. In fact, exports growth has already dropped sharply and some signs of a consumption slowdown are getting visible. Thus, we reiterate our forecast of 5.5% real gross domestic product (GDP) growth in FY24 against RBI’s expectations of 6.4%," added the brokerage.
While the February inflation may be close to 6%, according to the brokerage's view, Nirmal Bang anticipates CPI inflation to fall to approximately 5% in March from an earlier projection of about 4%. As a result, CPI inflation may range between 6.5 and 6.6% in FY23 and 5% in FY24.
