Consumer prices in Asia’s third-largest economy rose at the fastest annual rate in the 15 months in July, to 7.44% from 4.87% in June, largely driven by a sharp increase in prices of essential foods commonly used in Indian kitchens.
That sudden spike in inflation was likely to stay elevated for at least a few more months, the Aug. 18-28 Reuters poll of economists showed.
Nearly 75% of respondents to an additional question, 33 of 45, said inflation would fall to within the RBI’s 2-6% target range in the next quarter or beyond.
Of those respondents, 27 expected it in the October-December quarter, while six said first half of next year. Only two said it would fall back in August and 10 said in September of this year.
“It depends on what’s happening to the broader food price category, but certainly not in August. Perhaps September may still bring upside risk, and from October or November, it can start falling below the official target range,” said Dhiraj Nim, an economist at ANZ. “But that is entirely contingent upon how quickly prices of vegetables normalize.” The delay in taming inflation was likely to put pressure on Prime Minister Narendra Modi’s government to take action as it gears up for national elections in May 2024.
However, that was easier said than done, especially in a rain deficit year, as monsoons usually deliver nearly 70% of the rainfall the country needs to water crops and refill reservoirs and aquifers.
Following July’s sharp rise in inflation, economists upgraded their inflation forecasts to 6.6% for the current quarter, 5.7% for third-quarter FY 2023/24 and 5.3% for the fourth quarter, respectively, from 5.4%, 5.5% and 5.2%.
Median forecasts showed inflation averaging 5.5% and 4.8% this fiscal year and next to remain above the RBI’s 4% medium-term target beyond the first half of 2025.
“Given the CPI inflation print for July 2023 and our expectations for Aug-Sept 2023, the Monetary Policy Committee’s revised forecast for inflation for Q2 FY2024 of 6.2% appears to be at risk of being overshot,” said Aditi Nayar, chief economist at ICRA.
The RBI, which ended a modest rate-hiking cycle this February, was not expected to take rates higher.
The survey showed the RBI would hold the repo rate at 6.50% this fiscal year and then go for a 25 basis point cut in Q1 FY 2024/25.
Economic growth likely accelerated to 7.7% in the April-June quarter, the fastest annual pace in a year, on robust service sector growth, strong demand and increased government capital expenditure.
But growth was expected to moderate in the coming quarters, averaging 6.2% and 6.3% this fiscal year and next, largely unchanged from a previous poll.
“We all know consumption has more or less normalized,” added Nim.
He said uncertainty around next year’s general election would keep investments “on a wait and watch mode” and all these factors could keep growth “steady if not very strong.”
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