Soft May inflation print unlikely to alter rate hike path

India’s inflation easing in May from the previous month is unlikely to impact the ongoing monetary tightening as prices could remain elevated in the months ahead.

Data released June 13 showed headline retail inflation rate eased to 7.04 percent in May from April's near-eight-year high of 7.79 percent because of a favourable base effect. As per a Moneycontrol poll, Consumer Price Index (CPI) inflation was seen falling to 7.1 percent in May.

“The double whammy of the rise in the crude oil price and the INR depreciation pose upside risks to the June 2022 CPI inflation print, even as the lower than expected momentum in the services inflation in May 2022 provides some relief,” Aditi Nayar, Chief Economist at ICRA, said.

Retail inflation has stayed above the Reserve Bank of India’s medium-term target of 4 percent for 32 consecutive months and has exceeded the 6 percent tolerance ceiling for five months. Today, the Indian rupee settled at a fresh record low against the dollar, settling below 78 for the first time. Meanwhile, the benchmark Brent crude oil futures is hovering around $120 per barrel.

ICRA maintains its view that the Monetary Policy Committee will increase the policy rate by 35 basis points and 25 basis points, respectively, in the next two policy reviews, followed by a pause.

India’s MPC has raised the key policy repo rate by 90 basis points since early May to 4.90 percent as it focused on curbing inflation that has been pushed up due to rising food and fuel costs as well as supply-side issues.

The Centre has also lowered taxes on fuel and also taken a raft of other measures to ease input costs.

The country's rate-setting panel is widely expected to raise the policy rate to as much as 5.5-to-6 percent in the current rate hike cycle. Policy action after that could be data dependent.

Globally, red hot prices have pushed central banks to raise interest rates sharply over the last few months. US inflation spiked to a 40-month high last month, raising expectations of a 75-basis-point rate increase at its June 14-15 meeting.

“Overall rising price pressures remain a policy concern and are likely to pressure MPC further,” Madhavi Arora, Lead Economist at Emkay Global Financial Services, said.

“The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth has shifted the reaction function in favour of inflation containment,” she added.