CPI inflation may ease to around 5.3% in FY24, says HDFC Bank's Swati Arora

Swati Arora, Economist, HDFC Bank

Consumer price index (CPI) inflation is expected to ease to about 5.3 percent in the next financial year, aided by a correction in commodity prices, Swati Arora, Economist at HDFC Bank, said in an interview to Moneycontrol.

"Heading into FY24, CPI inflation is expected to ease to about 5.3 percent supported by a correction in commodity prices, while core inflation is expected to stay elevated at around 5.8 percent," she said.

She added that the upside risks to inflation could emanate from rising Covid cases in China,  and if cases in India rise as well,  that could again disrupt supply chains.

In November, the headline retail inflation declined to an 11-month low of 5.88 percent from 6.77 percent the previous month, while core inflation continued to remain high at over 6 percent.

Following a similar drop in October, November was the first time in 2022 that inflation had fallen below the 6 percent upper limit of RBI’s 4 +/- 2 percent tolerance band. However, CPI inflation has exceeded the medium-term target of 4 percent for 38 months in a row.

To fight higher inflation, the Reserve Bank of India (RBI) has aggressively hiked the repo rate since May. Thus far, the central bank has increased the repo rate, or short-term lending rate, by 225 basis points (bps).

Going ahead, Arora said elevated and sticky core inflation and downside risks to domestic growth due to weak external demand will remain a challenge for the RBI.

"The RBI has appropriately responded by tightening policy to control inflationary pressures, which in India’s case are predominantly supply driven," Arora said.

Also read: Inflation conundrum: How RBI’s commentary changed in 2022

Budget expectations

Arora expects the government to allocate higher capital expenditure amid headwinds like a slowdown in global growth and exports, and tightening financial conditions. Capex has a multiplier effect on economic output, making it essential for growth.

Further, the budget is likely to see enhanced allocation towards the National Rural Employment Guarantee Scheme, PM KISAN Yojana, etc., in order to support the rural economy.

"The government wants to return to a path of fiscal consolidation. In the FY24 budget, the government is likely to reduce the fiscal deficit by 0.4 percent to 6 percent of GDP," she said.

She expects borrowings , which are important for the bond market, to remain higher compared to the previous fiscal due to higher redemption. "This is likely to maintain upward pressure on bond yields," Arora said.

The yield on the 10-year benchmark government bonds have gone up from 6.45 percent at the beginning of the year to 7.31 percent as on December 28, 2022.

Also read: Year-ender: Rupee may have a highly volatile ride in 2023 on global headwinds, say experts

The Rupee

The Rupee is expected to trade in the range of 80.50-83.50 to the Dollar in calendar year 2023, said Arora.

"Stabilisation in crude oil prices given lower global demand, and a moderation in the Dollar rally as the market starts pricing in a Fed pivot, should lend some support to the Rupee," explained Arora.

She added that weak risk sentiment as Covid cases rise again, along with a slowdown in global growth, could keep any meaningful appreciation in check.

The INR:USD rate is likely to see some gains in H1 2023 within a band of 80.5-82.50, before moving to a higher range of 82-83.50 in H2, Arora said.

The rupee has remained volatile through the year and the RBI has been intervening in the forex market in the last few months to defend it from depreciating sharply. During this course, the central bank has spent heavily from its forex kitty.

But in the last few weeks, the forex reserves have seen some inflows. As on December 16, India's forex reserves stood at $563.5 billion, per RBI data.