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India’s inflation measured via the consumer price index (CPI) rose to 7% in August compared to 6.71% seen in July. The uptick was mainly led by a seasonal rise in food inflation, which accounts for nearly half of the CPI basket.
Economists note that the heatwave and uneven distribution of monsoon rainfall have weighed on the near-term comfort regarding food inflation.
“The broad-based nature of rise in food inflation is indicated by that fact that 73% of the food and beverage sub-components saw a 6% y-o-y or higher increase in August. The situation is unlikely to improve much in September, with daily food prices continuing to rise in the first two weeks,” Gaura Sen Gupta, economist at IDBI First Bank said in a report.
This means that food inflation is most likely to remain elevated in September as well.
Even though CPI inflation or retail inflation has eased from the multi-year high of 7.79% in April, it is still higher than the Reserve Bank of India’s (RBI) comfort zone of 2-6%. What adds to the RBI’s policy dilemma is that the index of industrial production indicated subdued growth of 2.4% in July.
Even so, economists expect RBI to focus on controlling inflation rather than weakening growth with more rate hikes. Forecasts of a repo rate hike for the 30 September RBI meeting ranged from 35-50 basis points (bps). One basis point is 0.01%.
According to Shilan Shah, senior India economist at Capital Economics, further ahead, headline inflation is likely to gradually decline. “Food inflation will fall over the coming months, helped by a more favourable base. Energy inflation is also set to continue easing as global oil prices moderate. We think the headline rate could drop to within the target range by early 2023,” he said in a report. So, he foresees a 50bps repo rate increase in September, but expects the central bank to slow the pace of tightening in December.
Concurring, Rahul Bajoria, managing director & chief India economist, Barclays said, while several supply issues appear in control, and inflation projections are biased lower, still the relatively resilient growth outlook, coupled with strong credit growth and sticky core inflation, will keep the RBI’s focus firmly on managing inflation.
“We now expect the RBI to deliver another 50bps rate hike in September, taking the repo rate to 5.90%, which should also be the time when real rates reach levels desired by the MPC. If inflation remains sticky, we believe the RBI can continue hiking in December, although we now expect no action in December, as things stand,” he said in a report.
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(This story has not been checked by Kashmir Bulletin and is auto-generated from other sources)
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