Inflationary pressure likely to build up after Oct-nov

Economists believe the MPC may not raise policy rate till at least the third quarter

Fall in the retail price inflation rate to a three-month low of 5.9 per cent in July may be transitory and may not last beyond October- November this year after consumer demand rises with supply constraints remaining and low base effect of the previous year wanes away.

Fall in retail price inflation rate to a three-month low of 5.9 per cent in July may be transitory. It may not last beyond October-november this year after consumer demand rises with supply constraints remaining and the low-base effect of the previous year wanes away.

Consumer price index (Cpi)-based inflation rate came below the upper limit of the monetary policy committee’s (MPC'S) tolerance ceiling after two months due to decline in the rate of price rise in food items, particularly sharpening of deflation in vegetables.

Economists believe that the MPC may not raise the policy rate till at least the third quarter of the current fiscal year since economic growth is a concern. It may keep addressing systemic liquidity.

Former chief statistician Pronab Sen told Business Standard that going forward, consumer demand may rise quickly while that for investment is in bad shape.

“This means there is damage to the supply side. While pricing power of big corporates have gone up, that of MSMES (micro, small and medium enterprises) have not come back,” he said.

The MPC, in its latest policy review, said that input prices are rising across manufacturing and services sectors. However, it also says that weak demand and efforts towards cost cutting are tempering the pass-through to output prices.

Soumya Kanti Ghosh, chief economic advisor at State Bank of India (SBI) group, believes that this downward trajectory of CPI inflation could be a blip.

“As the economy opens up, the second round pass-through from fuel prices will gather momentum,” he said.

The fuel inflation rate remained elevated in July despite some moderation from the previous month. Petrol was still at 23.7 per cent inflation rate against 24.54 per cent last month. Diesel saw higher moderation to 22.71 per cent compared to 28.7 per cent.

Ghosh said, more importantly, seasonally-adjusted month-on-month momentum of core inflation rate (which does not take into account food and fuel inflation rate) is now closer to the trend. “Core is currently at 5.94 per cent and we expect it to go up from these levels,” he added.

“Our full-year forecast of the average inflation rate is 5.9 per cent for 2021-22, which is a bit higher than the MPC’S estimates at 5.7 per cent,” he said.

However, the MPC also expected the inflation rate to be 5.9 per cent in the second quarter of the current fiscal year. If this turns out to be true, the inflation rate may rise in August and September or one of these months compared to the July figure.

Madan Sabnavis, chief economist at CARE Ratings, said inflation rate will remain 5-5.5 per cent in the next two months and then increase. The inflation rate was down in July on a high base effect, which will last till Septemberoctober, he added.

“Core will remain sticky and rise,” Sabnavis said. He pointed out that service prices are going up.

Even health services, the crucial segment during Covid times, saw inflation rate rising moderately to 7.74 per cent from 7.71 per cent.

Devendra Pant, chief economist at India Ratings, said, decline in retail inflation rate in July was due to both base effect and slow price build up.

“The base effect will continue to help inflation slide at least till November 2021. Inflation is expected to decline slightly in the third quarter,” he said.

Rahul Bajoria, chief India economist at Barclays, said, “We expect the CPI inflation rate to be somewhat sticky in the coming months, but over the next six months, see it modestly trending lower.”

Aditi Nayar, chief economist at ICRA, said with the inflation expected to remain sticky in the 5-6 per cent range over the next three quarters, it’s increasingly difficult to characterise the pressures as purely transitory in nature. “A small disruption could push inflation back above the 6 per cent threshold,” she added.

Rumki Majumdar, economist at Deloitte India, said, “We believe that inflation may ease in the coming months assuming no rise in infections. However, high oil and commodity prices will keep the pressure on prices.”

Sabnavis said crux is the Kharif crops and their price effect. Sowing of Kharif crops gained momentum and hit almost 2020 levels during the week ended August 13. However, concerns remain over the final output because of delay in the planting of some crops, which have crossed their ideal sowing time.