MUMBAI (Reuters) – Analysts say that even though India’s headline retail inflation fell for the third month in a row in July, it is likely to stay above the central bank’s upper tolerance range for the next few months. This will mean that the central bank will have to raise interest rates again in the coming months.
“High-frequency price data indicate that headline inflation is likely to remain roughly unchanged in August as it was in July.”
Inflation will stay above 6% until February 2023, and that core CPI inflation will stay just below 6% for the rest of FY2023, “Nomura economists Sonal Varma and Aurodeep Nandi said in a note.
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In July, India’s consumer inflation dropped to 6.71 percent. This was because food and fuel prices went up less quickly than they had been. The National Statistics Office released the year-on-year figure on August 12. It was just a little bit lower than the 6.78% that economists in a Reuters poll had predicted, but it was still above the central bank’s tolerance band for the seventh month in a row.
Over the medium term, the Reserve Bank of India wants to keep inflation at 4.00%, with a range of 200 basis points on either side.
“Due to the uneven rain, it is still hard to tell what will happen to food prices in the future. Prices of vegetables, cereals (rice and wheat), and pulses have been going up for the first two weeks of August. Lack of rain in key producer states has made it hard to plant rice, “said Gaura Sen Gupta, India economist at IDFC First Bank (NASDAQ:FRBA).
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Even though inflation is going down, economists think that the RBI’s monetary policy committee will continue to raise policy rates, though not as much as the last three times.
Since May, the MPC has raised the key policy rate by 140 basis points, bringing it to 5.40%. This is because inflation is still a big worry. The next decision about monetary policy will be made on September 30, and most market participants expect another increase.
Nomura and IDFC First Bank think that the RBI will raise the repo rate by another 60 basis points, to 6.00%. Barclays (LON:BARC) thinks that interest rates will go up by another 50 basis points over the next two meetings. While Nomura thinks inflation will average 6.8% this fiscal year, IDFC First Bank thinks it will average 6.5%, which is less than what the central bank thinks it will be at 6.7%.
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At its meetings in September and December, we expect the RBI to raise the repo rate by 25 bps each time. This would bring the rate to 5.90%. But if the prices of commodities around the world keep going down, there is a chance that the bank won’t raise rates in
Rahul Bajoria, Barclays’ chief India economist, said.
