Business

Retail Inflation Likely to Drop in July; Will it Come Under RBI’s Tolerance Level?

Even as the global commodities prices are witnessing easing amid recession fear, inflation in India might have also slowed in July. Recently, crude oil prices have fallen, which has given respite to domestic commodity prices as well. The RBI has also kept its inflation forecast unchanged at 6.7 per cent for the current financial year 2022-23. According to a Moneycontrol poll, retail inflation may have dropped to 6.7 per cent in July.

The inflation, whose latest official data will be released on Friday, in June slightly eased to 7.01 per cent as compared with 7.04 per cent in May. According to the Moneycontrol report, headline retail inflation likely cooled in July, led by lower food prices, with prices of certain key items posting a sequential fall.

Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat expects inflation to be above 6 per cent for the second and third quarters. “With inflation expected to go below 6 per cent in Q4 of FY23 and then to go down further in Q1 of FY24, we expect the RBI not to use rate hikes as a tool anymore in those quarters and move to liquidity management measures to ensure that the growth is not stiffled.”

The RBI has retained its inflation forecast at 6.7 per cent for 2022-23. On the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, “the inflation projection is retained at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.4 per cent; and Q4 at 5.8 per cent, and risks evenly balanced. CPI inflation for Q1:2023-24 is projected at 5.0 per cent”, according to the RBI’s monetary policy statement.

Madhavi Arora, lead economist, Emkay Global Financial Services, has said, “We are tracking July inflation at 6.7-6.8 per cent, with quarter average around 7 per cent. This is already baked in the RBI’s forecast, which is slightly higher than our estimates. We maintain our FY23 CPI inflation estimate at 6.5 per cent with a mild downward bias (RBI: 6.7 per cent).”

Stating that the CPI inflation in June was in line with expectations at 7 per cent, Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said “We have been expecting inflation to remain around the 7 per cent handle for the rest of 1HFY23. Food items continue to see an upside in price momentum, in line with the seasonal trends. Core inflation was flat at 6.2 per cent with price momentum softening slightly from last month.”

Rakshit added that overall, the June inflation print should keep the RBI on course with the rate hikes without new causes for concern. Inflation should gradually decline in 2HFY23. We continue to pencil in repo rate hike of 35 bps in the August policy and RBI should stay on course to reach 5.75 per cent by end of CY2022.