MC Interview: Inflation for July-September will cross RBI's projection, says HDFC economist Sakshi Gupta

Even for the whole year, Gupta estimates average inflation at 5.6 percent compared with the RBI's projection of 5.4 percent.

Inflation for July-September will be higher than the Reserve Bank of India’s projection of 6.2 percent, Sakshi Gupta, principal economist at HDFC Bank, said in an exclusive interview with Moneycontrol on August 11.

Even for the whole year, Gupta estimates average inflation at 5.6 percent compared with the RBI's projection of 5.4 percent.

Also, it is unlikely that the RBI will react and hike rates again in the next few months, Gupta added. She said the increase in vegetable prices will likely cool off in the next two months. The RBI will probably be on pause mode throughout FY24, Gupta added. Edited excerpts:

Will inflation be contained within the RBI’s average outlook of 6.2 percent in July-September, considering elevated food prices?

Gupta: I have an estimate that the inflation numbers average for July-September will be higher than the RBI's estimates of 6.2 percent. So I'm expecting it to stay around 6.4 percent. And even for the whole year, I have a higher estimate of average inflation of 5.6 percent compared to the RBI's estimate of 5.4 percent.

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I'm particularly concerned about the fact that the RBI assumes a normal monsoon for August and September. We know that IMD (India Meteorological Department) is projecting August to be below normal in terms of monsoon. Those projections have already come out. There are headwinds coming in from the fact that Russia has backed out of the grain deal and that exports there are being affected.

Inflation in food prices usually sustains for 3-4 months. Can we expect inflation to remain sticky for the next 2-3 months?

Gupta: Yeah. So given the pressures on vegetable prices that we are currently seeing and the expectation that there is also some pressure on cereals, pulses and higher commodity prices, we are expecting inflation to remain above 6 percent for July, August, and September – all three readings.

Inflation is likely to remain elevated over a few months. Can we expect a rate hike in the next policy after three consecutive pauses?

Gupta: It is unlikely that the RBI will do rate hikes in the next few months. If there is visibility that the vegetable price increase is cooling off, then inflation can suddenly also drop and we do not see further pressures on other items of the food basket.

I think they will be on pause throughout FY24 and then a rate cut is something that they will only start considering or talking about in the April or June policy, not before that.

Because of supply-side measures that are announced by the government or because of a more normal progression of the monsoon in August and September, I don't think that the RBI will react and hike rates again.

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They would perhaps keep rates where they are at 6.5 percent, unless the inflation risks that we just spoke about increase from the trajectory that the RBI is looking at currently.

I think that the liquidity bid that they are doing is also effectively a response to partly remove liquidity because of the Rs 2000 note withdrawal. I think liquidity tightening could be a preferred tool rather than a rate hike.

There will be some impact on short-term rates due to the introduction of the incremental cash reserve ratio. Will it impact deposit or lending rates?

Gupta: Yes, absolutely. Tighter liquidity conditions coupled with the fact that this is going to lead to a greater transmission of past rate hikes which haven't filtered through to a full extent, there can be some upward pressure on both deposit and credit rates going forward. So, this is part of the transmission of rate hikes that have already happened, and tighter liquidity conditions will just accelerate that.

The RBI said it will continue variable rate reverse repo auctions. Will there be much interest in this after the incremental cash reserve ratio?

Gupta: It depends from bank to bank and their own liquidity positions. But given the shorter duration, once, maybe yes. For the longer-duration ones, I mean, at least it could come down. But as it is, at least for the next one month with this incremental CRR, you will see a reduction in the liquidity of they've said more than Rs 1 lakh crore. I don't see the RBI doing VRRRs within this time period. But post that, if they stop this measure and then they are doing, for the shorter duration ones, yes, there can be interest.