Inflation poised to slow gradually on normal monsoon, lower crude price estimate

A lot of what happens going ahead will hinge on the monsoon and how global crude oil prices evolve. While crude oil prices have risen again this week and could impart volatility to inflation prints, monsoon rainfall is expected to be normal this year. Agriculture -- highly dependent on the rains for irrigation -- employs more than half of the workforce in the world’s second-most populous country, making up about 15 percent of economic output (Representative Image)

Inflation is expected to ease in the second half of this financial year, providing relief to consumers forced to cut spending because of rocketing prices.

Inflation measured by the Consumer Price Index (CPI) accelerated to 7.79 percent in April. This is the highest reading since 8.3 percent in May 2014, and remains above the upper limit of the central bank’s tolerance band of 6 percent for the fourth month in a row.

“We expect domestic inflation to peak over the next few months and decline in 2HFY23 on base effects,” Sanjeev Prasad of Kotak Institutional Equities said. The estimate hinges on an average crude oil price of $105 per barrel and normal monsoon rainfall.

Elevated inflation can hurt economic growth and hit corporate earnings as the middle class and low-income earners cut back spending to cope with the higher cost of living.

Economists expect retail inflation to have eased to about 7 percent in May. The official figure will be released on June 13.

The Reserve Bank of India (RBI) projected 2022-23 retail inflation at 5.7 percent in April.

In May, when it surprised the markets with an off-cycle, repo rate increase of 40 basis points (bps), the RBI warned that the Russia-Ukraine war, global commodity price dynamics and supply-chain issues posed significant upside risks to the inflation trajectory.

Since then, Prime Minister Narendra Modi’s administration has acted swiftly to curb inflation. New Delhi has slashed taxes on fuels for the second time in six months, capped wheat exports, and tweaked a raft of duties to control food and input costs.

Barclays expects RBI to raise its full-year inflation projection to 6.2-6.5 percent next week but “continue to predict a gradual decline in inflation over its forecast horizon.”

In April, RBI predicted inflation to decline in fiscal 2022-23 as the year progresses. It then projected inflation at 6.3 percent in the first quarter, 5.8 percent in the second quarter, and at 5.4 percent and 5.1 percent in the third and fourth quarters, respectively.

Kotak Institutional Equities expects inflation to average 6.4 percent for the full year and slow to 4.6 percent by March 2023. This will be, in part, be an outcome of coordinated monetary and fiscal actions.

Finance ministry officials over the last week also expressed hope that inflation will cool.

Economic Affairs Secretary Ajay Seth said he expects a recent moderation of commodities prices to have a salutary impact on inflation. Chief Economic Adviser V Anantha Nageswaran said the government and central bank were seized of the matter and addressing it.

The risk of sustained high inflation is low because aggregate demand is recovering slowly, according to the finance ministry’s latest monthly economic report.

In fact, further hikes in policy rates are now being seen as a mere normalisation of policy, not as tightening. On May 31, Nageswaran said RBI’s rate increases were a sign that economic recovery was taking hold after data showed India’s Gross Domestic Product (GDP) likely grew 8.7 percent in FY22 and 4.1 percent in January-March.

Around two percentage points of the April inflation rate was on account of so-called imported inflation.  A lot of what happens going ahead will hinge on the monsoon and how global crude oil prices evolve.

While crude oil prices have risen again this week and could impart volatility to inflation prints, monsoon rainfall is expected to be normal this year.

The June-to-September monsoon is significant for the overall economy because it accounts for 70 percent of annual rainfall in a country where about half the farmland depends on rains for irrigation.

Agriculture employs more than half of the workforce in the world’s second-most populous country, making up about 15 percent of economic output.