The headline retail inflation for the month of August slowed to 6.83 percent but remained above the RBI’s tolerance band, owing to which experts said that the Reserve Bank of India (RBI) is likely to maintain a pause in the repo rate cycle in FY 2023-24.
“On the monetary policy front, RBI has indicated that it will look through the food-led spike in inflation as it is expected to be transient. However, it indicated its willingness to act if inflation shows signs of generalization i.e spreading from food to core inflation. For now, core inflation has remained well behaved with moderation in both services and goods inflation. RBI is expected to remain on pause in FY24,” said Gaura Sen Gupta, Economist, IDFC Bank.
Aditi Nayar, Chief Economist, Head Research & Outreach, ICRA, said: “While we expect the CPI inflation to print in the range of 5.3-5.5 percent in September 2023, this will still entail an average of 6.6 percent for Q2 FY2024, well above the MPC's August 2023 forecast for this quarter. We expect RBI to call for an extended pause.”
Also read: Inflation numbers in line with expectations, but uncertainty still remains, say experts
“The RBI could take some comfort from this print but given headline is still significantly above 6%, we expect liquidity tightening to continue. Next inflation print is expected to show further moderation but still remain above 6%,” said Sakshi Gupta, Principal Economist, HDFC Bank.
Earlier, Shashanka Bhide, one of the three external members on the Monetary Policy Committee (MPC), in an interview with Moneycontrol said that the inflation rate may fall below 7 percent in August.
"I expect the headline inflation to be elevated, but moderated from the level seen in July. It is likely to be below 7 percent,” Bhide said.
High in July
In July, headline retail inflation rate crashed past the upper bound of the RBI 2-6 percent tolerance range and shot up to a 15-month high of 7.44 percent, spurred on by a massive increase in vegetable prices.
Also read: July retail inflation at 15-month high of 7.44%
Here, markets and the regulator were prepared for an increase in inflation, with the central bank on August 10 raising its CPI inflation forecast for July-September by 100 basis points to 6.2 percent even as its Monetary Policy Committee (MPC) left the policy repo rate unchanged at 6.5 percent for the third meeting in a row.
The MPC is scheduled to meet next from October 4-6.
HDFC Bank's Gupta said that inflation came in lower than expected in August, primarily driven by a greater moderation in vegetable inflation as tomato prices cooled off in the month.
Bond yield
Money market experts said bond yields may see a downward movement due to fall in inflation numbers.
“Bond markets might take a bit of relief and see slight downward movement in yields in near term, the persistence of inflation and trajectory will determine the larger move,” said Akhil Mittal, Senior Fund Manager – Fixed Income, Tata Asset Management.
Further, dealers expect yield on the 10-year benchmark bond to trade in the range of 7.10 percent to 7.25 percent in the near term.
Today, the yield on 10-year benchmark bond 7.18 percent 2033 closed at 7.2002 percent.
“Yields are expected to trade in a narrow band of 7.12-7.25% levels till policy dates,” said Ajay Manglunia, managing director and head of investment group at JM Financial
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