Moneycontrol Pro Panorama | Inflation is down, but not out

(Representative image: Reuters)

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The consumer price index (CPI) inflation for June at 7.01 percent was lower than expected. Food inflation moderated, while the cut in fuel taxes also helped. The average CPI inflation for April-June is 7.3 percent compared to the Reserve Bank of India's estimate of 7.5 percent.

Is it time to pop the champagne? Perhaps not.

Recession fears, or at least concerns about a global economic slowdown, have led to a sharp fall in prices of commodities and global food prices in recent weeks. Prices of industrial commodities, such as metals and cotton, have fallen by around a quarter since June. Brent crude prices dipped below $100 a barrel for the first time in three months. In India, the prices of vegetables, sugar, milk, tea, pulses, and vegetable oils have also fallen so far in July, point out Nomura economists.

Thus, it seems safe to assume that peak inflation is behind us. That said, core inflation (minus food and fuel) still remains elevated at around 6 percent.

The depreciation in the rupee despite RBI’s steps to free up inflows points to continued imported inflation. These steps are aimed at increasing non-resident Indian (NRI) deposits, but that’s not going to be easy for various reasons, as outlined in this piece.

Moreover, in the US, CPI inflation is expected to rise further to 8.8 percent in June, prompting the Federal Reserve to be more aggressive in hiking rates. That is negative for the rupee.

Further, fears of more lockdowns in China as it pursues its zero-COVID policy, and supply-side disruptions mean that inflation may not come down in a hurry.

There are other local risk factors, too. Electricity tariffs are being raised in several states as prices of coal and natural gas stay elevated. Higher kerosene and cooking gas prices are also likely to keep fuel inflation high.

Meanwhile, services inflation (excluding housing) is close to 6 percent, as per Nomura’s estimates.

What does this mean for monetary policy?

In all likelihood, RBI’s monetary policy committee will continue increasing rates as it seeks to temper inflation expectations of households. It will, however, move cautiously so as not to dent growth too much.

Economists are predicting that rate hikes will be of smaller sizes, say a quarter of a percentage point, and that the cycle itself will not be unduly long.​

Investing insights from our research team

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What else are we reading?

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Martin Wolf writes: Inflation is a political challenge as well as an economic one (republished from the FT)GuruSpeak | Meet this farmer’s son who made the jump to full-time price-action trading

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Technical Picks: Mindtree, Dr Reddy’s, Guar gum, Reliance Industries and BSE (These are published every trading day before markets open and can be read on the app)

Ravi Krishnan
Moneycontrol Pro