LPG price cut may impact 30-40 bps on inflation in coming months, says Upasna Bhardwaj

LPG price drop could chip away at India's inflation in coming days

The reduction in prices of liquefied petroleum gas (LPG) by the Union government on August 29 is likely to have an impact on the Consumer Price Index (CPI) inflation by 30-40 basis points in the coming days and some impact may witness in September print, Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank told Moneycontrol in an interview on September 1.

“The impact of the LPG price cut on inflation is expected to have a direct impact by 23 basis points (bps) and an additional 8-10 bps indirectly,” Bhardwaj said.

One basis point is one hundredth of a percentage point.

She added that the direct impact of the LPG cut is expected to be witnessed in the September reading.

On August 29, Union Cabinet announced a reduction in prices of liquefied petroleum gas (LPG) for all 330 million users in the country in a major relief measure ahead of the festive season.

“All domestic consumers of LPG cylinders to get Rs 200 subsidy per cylinder. Further, users under the PM Ujwala scheme will get this subsidy on top of the existing subsidy," Union information and broadcasting minister Anurag Thakur said at a Cabinet briefing on August 29. The additional subsidy on LPG cylinders will come into effect immediately as a Raksha Bandhan and Onam gift, the minister added.

With this, the subsidy for Ujjwala beneficiaries now stands at Rs 400 per LPG cylinder.

Further she said that the next two reading of the inflation is likely to remain above the upper tolerance band of 6 percent of the Reserve Bank of India (RBI).

“Given the supply disruptions across food categories, the next two readings are any case expected to remain above the upper tolerance band,” Bhardwaj said in an interview.

In July, India's headline retail inflation rate shot up to a 15-month high of 7.44 percent due to increase in vegetable prices, data released by the Ministry of Statistics and Programme Implementation on August 14 showed.

At 7.44 percent, the CPI inflation print for July is a huge revised 257 bps higher than the June number of 4.87 percent and is the 46th month in a row that it has come in above the RBI's medium-term target of 4 percent.

The RBI in the August monetary policy made an upward revision to its inflation forecast for 2023-24, raising it by 30 basis points to 5.4 percent.

On this RBI Governor Shaktikanta Das in monetary policy speech said headline inflation projection for Q2 of 2023-24 has been revised up substantially, primarily due to the price shock from vegetables.

"Given the likely short-term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time," Das added.

Despite the expectation of inflation and breaching above upper tolerance band, Kotak Mahindra Bank’s economist expect the central bank may hold hike in repo rate and may use liquidity tools to keep short-term rates elevated in the near term to manage inflationary expectations.

Bhardwaj also said using the liquidity tool the central bank avert any speculative positions on the Indian rupee.

In August monetary policy, the RBI kept interest rates unchanged at 6.50 percent, consecutively three times in a row, after hiking 250 basis points since May last year.

Jayanth R. Varma, in August policy minutes,  said the current level of the repo rate is high enough to bring inflation below the upper tolerance band on a sustained basis and also glide it towards the middle of the band.

Governor Shaktikanta Das said given the likely short-term nature of the vegetable price shocks, monetary policy can look through the first-round impact of fleeting shocks on headline inflation.

"At the same time, we need to be ready to pre-empt any second-round impact of food price shocks on the broader inflationary pressures and risks to anchoring of inflation expectations," Das said.

During the interview, Bhardwaj said she do not see a sustainable move of inflation towards 4 percent just yet.

“We expect the 4QFY24 inflation reading to tread towards an average of 4.7%."

However, the central bank projected CPI inflation, assuming a normal monsoon, Q2 at 6.2 per cent, Q3 at 5.7 per cent and Q4 at 5.2 per cent. CPI inflation for Q1:2024-25 is projected at 5.2 per cent.

Headline inflation projection for Q2 of 2023-24 has been revised up substantially, primarily due to the price shock from vegetables, the RBI said in a monetary policy.