MC Interview | Retail inflation may come in at 5.3% in September, says DBS Research’s Radhika Rao

The monetary policy committee voted to stay vigilant on inflation with a hawkish hold. In our view, this is prudent on two counts. First, this will help anchor inflationary expectations and prevent a generalisation in price pressures. A case in point was the fall in the latest three-month and one-year expectation readings to levels last seen in the first half of 2020.

Second, hawkish rhetoric also reflects a defensive posture in the midst of global uncertainties as policymakers are mindful of the spillover risks from tight external financial conditions and narrowing (rupee-dollar) rate differentials.

Also read: CPI inflation may have hit 3-month low of 5.4% in September

Considering El Nino and other factors such as crude oil prices, how do you anticipate inflation will develop?

Upcoming inflation prints are likely to be off the July-August highs, with the path thereafter to be determined by the food trajectory impacted by lower area sown under pulses, fall in reservoir levels and El Niño conditions, alongside spillover from firm oil prices. Our forecast path points to inflation cooling off towards the 5 percent handle in the rest of FY24, followed by a firm start to FY25 before base effects and (likely) favourable drivers push inflation back below 4.0-5.0 percent during the year.

We see a lower scope of spillover to the domestic retail pump prices in an election year, thereby limiting any material change to the inflation trajectory. With food likely to be a bigger driver than fuel, we maintain our CPI forecast of 5.5 percent for FY24, holding on to our call for a delayed start in the easing cycle.

On October 12, inflation print will be released. What are your expectations? Will it remain above the tolerance band, or can we expect moderation?

September inflation is likely to provide a reprieve, with the headline at 5.3 percent on-year from 6.8 percent the month before, set to return to the target range after two consecutive months of elevated prints. Vegetable inflation decelerated in the month, whilst ‘stickier’ components like foodgrains, sugar, etc, continued to retain gains.

Non-food trends should benefit from lower cooking gas prices whilst domestic subsidised retail fuel prices stayed shielded from high global crude oil levels. Notwithstanding a lower headline print, the RBI reiterated its preference to be cautious on inflation at last week’s rate review. Industrial production is expected to jump on base effects and restocking ahead of base effects.

Which category in the inflation index will be crucial to monitor in the coming months?

Food and fuel are likely to be the key swing factors in the coming months, making up close to 60 percent of the overall weight.

Also read: Power ministry outfit under NCLT glare on bankruptcy plea by vendor

When do you believe the RBI will be able to achieve the 4 percent inflation target?

We expect the headline to edge towards 4 percent and temporarily test below next year, also helped by base effects, assuming the absence of fresh supply-side shocks and a sharp squeeze higher in the oil prices

When are rate cuts expected?

With the 1QFY25 inflation forecast at 5.2 percent, the real rate (repo rate minus inflation) will be around 130 basis points, suggesting limited room to ease rates for the rest of FY24 and early FY25.

The real buffer is likely to widen over the course of the next fiscal year, as the RBI’s model estimates that inflation could average below 5 percent in FY25, opening the door for a possible pivot.