Core inflation brings no joy to RBI as supplies tighten
MUMBAI : A declining core inflation, amid a 15-month high retail inflation, gives no reprieve to the Reserve Bank of India (RBI), which recently called for supply-side interventions to cushion food price shocks. Inflation, without accounting for food and energy prices, known as core inflation, stood at 4.9% in July, as against 5.1% in June. Economists believe it will remain sticky in the coming months.
They said that while a decline in core inflation is positive, high headline numbers have anyway dashed rate cut hopes in FY24. Headline consumer price index (CPI) inflation rose to 7.4% in July, from 4.8% in June as against a Bloomberg consensus of 6.5%. This was higher than RBI’s flexible tolerance band of 2-6%, a range retail inflation breached after a gap of five months.
“We think core inflation is likely to remain sticky at around 5% in the near term, as demand remains resilient," Barclays said on Monday. Barclays raised its FY24 inflation forecast again to 5.4%, from 5% earlier, taking into account higher-than-expected July CPI and likely elevated August numbers. However, by September, it expects CPI inflation to come back to the RBI’s tolerance band, saying there is room for CPI to even fall below 5% by the end of 2023.
RBI governor Shaktikanta Das said on 8 June that a durable disinflation in the core component would be critical for a sustained alignment of the headline inflation with the target. Others said food inflation requires supply-side measures, which puts it beyond the ambit of monetary policy. “Though the moderation in core inflation is reassuring, the possibility of elevated headline numbers in the upcoming months has pushed the expectation of a rate cut by the RBI to the next fiscal," economists at Care
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