Interview: MPC's Shashanka Bhide sees CPI inflation falling below 7% in August

According to Bhide, the spillover from the July inflation print to the full-year trajectory may not be much.

India's key inflation rate may fall below 7 percent in August, Shashanka Bhide, one of the three external members on the Monetary Policy Committee (MPC), has said.

"I expect the headline inflation to be elevated, but moderated from the level seen in July. It is likely to be below 7 percent," Bhide told Moneycontrol in an interview following the release of the minutes of the August 8-10 MPC meeting on August 24.

Bhide's comments come in a month that has seen the Indian government take multiple steps to rein in a huge spike in the prices of certain key food items, which had pushed Consumer Price Index (CPI) inflation to a 15-month high of 7.44 percent in July. That data was released only four days after the Reserve Bank of India (RBI) revised its 2023-24 forecast upwards by 30 basis points to 5.4 percent, sparking concerns that inflation may end up averaging even higher. This has also led to economists pushing their expectations of interest rate cuts closer to the middle of 2024.

One basis point is one-hundredth of a percentage point. CPI data for August will be released on September 12 - three weeks before the MPC meets again on October 4-6.

Also Read: Is the RBI's new inflation forecast already outdated?

Bhide admitted the rise in inflation in July was indeed "sharp", although the spillover to the full-year trajectory may not be much.

"Given that the sharp rise in headline inflation is mainly due to (temporarily high) vegetable prices, the risks to the projected overall inflation for the year may not be high," the rate-setter said.

"However, there's the risk that an unfavourable monsoon may help sustain high food prices, unless they are offset by supply-enhancing policies," he went on to warn.

Focus on inflation

In July, retail food inflation more than doubled to 11.5 percent on the back of vegetable inflation shooting up to 37.3 percent. Both these figures are the highest since January 2020. The government has taken a raft of measures to keep prices from spiralling out of control — including the sale of tomatoes at discounted prices, imposition of a 40 percent export duty on onions, a ban on the export of non-basmati white rice, a 20 percent export duty on parboiled rice, and open market sales of rice and wheat, among others. Speculation is rife that the government is mulling further measures.

Also Read: Need 'major reforms' in supply chains to control food price shocks, says RBI Bulletin

According to Bhide, in the near term, "it is best to focus on food items vulnerable to price shocks by increasing supplies, as has been done, and also to ensure supplies to social safety nets".

Even as headline inflation has surged, core inflation — or inflation excluding food and fuel — has cooled appreciably, even falling below 5 percent in July. For Bhide, moderation in core inflation is "certainly an important positive sign".

The MPC's decision on August 10 to stay put on rates was the third meeting in a row that it had left the policy repo rate unchanged at 6.5 percent, although it has maintained it is prepared to act, if needed. Economists, however, are unanimous in their expectation of no further rate hikes, with rate cuts seen in the first half of 2024.

Also Read: What the economist who got July CPI inflation (almost) right thinks will happen next

According to Bhide, an honorary Senior Advisor at the New Delhi-based National Council of Applied Economic Research, as the inflation target "still remains to be achieved in a sustainable way, continued focus on inflation is necessary".

CPI inflation has been above the RBI's medium-term target of 4 percent for 46 months in a row.

Uneven consumption

Like inflation, India's growth rate is rising, although that's a positive. GDP growth rose far more than expected to 6.1 percent in January-March. Data for April-June will be released on August 31, with the RBI forecasting a jump in the growth rate to 8 percent, thanks to a favourable, albeit waning, base effect.

According to Bhide, a growth rate of 8 percent in April-June would be "remarkable", although he noted that the full-year growth forecast of 6.5 percent was "significantly" lower than 7.2 percent in 2022-23.

"Weak external demand is a concern. The government's increased capex and incentives for increased production are positive for investment spending. However, consumption spending is showing uneven growth trends. A broad-based rise in consumption expenditure is necessary to sustain high growth," he said.

With Bhide's term on the MPC entering its final year — he and his fellow external members, Ashima Goyal and Jayanth Varma, started their four-year terms in October 2020 — he expects "considerable progress" to be made in maintaining price stability along with growth in the coming 12 months with the tools at the committee's disposal.

"MPC cannot be effective in isolation given the goals of price stability along with growth. The economy has been remarkably resilient to shocks, and this feature would be key to achieving sustainable growth," he said.