Retail inflation cooling along expected lines in July may allow the rate-setting Monetary Policy Committee to go for less aggressive rate hikes in the upcoming meetings, economists said on August 12.
Data released on August 12 showed India's headline retail inflation rate, as measured by the Consumer Price Index (CPI), fell to a five-month low of 6.71 percent in July. A Moneycontrol poll had shown inflation was expected to fall to 6.7 percent from 7.01 percent in June.
Further, core inflation - or inflation excluding food and fuel - as per its broadest definition fell to 5.8 percent in July from 6 percent in June, according to Moneycontrol calculations. At 5.8 percent, core CPI inflation is the lowest since September 2021, when it had also come in at 5.8 percent.
According to Sunil Kumar Sinha, principal economist at India Ratings and Research, the declining inflation trend is no doubt good news for the monetary authority. More rate hikes may still follow depending on the incoming data in the rest of FY23. As things stand, Sinha expects another 25-to-50 bps hike in the repo rate in FY23.
“We expect the Reserve Bank of India to deliver two 25 bps rate hikes each at the September and December meetings, taking the repo rate to 5.90 percent,” said Rahul Bajoria, chief India economist at Barclays. “However, if global commodity prices continue to decline, we note the risk that the bank does not raise rates in December.”
The MPC’s next policy decision is on September 30.
The MPC has hiked the repo rate by a total of 140 bps in three steps since May to quell inflationary pressures in the economy.
According to Aditi Nayar, chief economist at ICRA, the next rate hike, in September, could even be smaller than 25 bps.“Given the MPC’s focus on anchoring inflation expectations and the governor’s statement on inflation moving closer to the target of 4 percent over the medium term, we expect another rate hike of around 10-to-35 bps in the September 2022 policy meeting,” said Nayar. “Thereafter, we believe the MPC is likely to be extremely data dependent.”