CPI Inflation at 15-month peak pushes rate cut target to FY25; RBI likely to be on wait & watch mode
RBI) upper tolerance limit of 6%, driven by high food and vegetable prices. The retail inflation in June was 4.81%. However, core inflation data was seen as a relief.
The core inflation, which excludes food & beverages and fuel & light, fell to 4.9% from 5.1% in June, the lowest in almost three years. Read here: India's retail inflation surges to 7.4% in July on high vegetable prices; food CPI highest since October 2020 Analysts believe this reinforces that the current surge in inflation is transitory and will correct in 2-3 months. Amid a wide perception that the high inflation would not last long and is just transitory, economists and analysts believe the RBI’s Monetary Policy Committee (MPC) will not hike interest rates in its next meeting, but the hopes of a rate cut has further pushed to early FY25.
Prasenjit Basu, Chief Economist, ICICI Securities thinks the MPC will be reassured by the moderation in core inflation, and thus will see no further need for monetary tightening to deal with this unexpectedly-large spurt in headline inflation. The financial market saw a knee-jerk reaction to the higher than expected inflation data as investors will now look ahead to the RBI’s September policy. On August 10, the RBI delivered a ‘hawkish pause’ as the MPC remained cautious on inflation.
The central bank kept the repo rate unchanged, but raised CPI inflation forecast for FY24 to 5.4% from 5.1% earlier. The inflation forecast for Q2FY24 was raised to 6.2% from 5.2%. Read here: RBI Policy Meeting Highlights: RBI Governor Shaktikanta Das delivers ‘hawkish pause’; remains cautious on inflation RBI Governor Shaktikanta Das maintained his hawkish tone by indicating that the MPC was ready to act if the inflationary pressures
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