India's Retail Inflation to Breach RBI Target, Pace of Rate Cuts Slows Down

Strategic Insights -

Policymakers in India are facing growing pressure to raise the retail inflation target as sticky pulses and cereal prices continue to drive up inflation, despite easing vegetable price pressures. Nomura analysts predicted that India's retail inflation will surge to 6.0-6.5% in July and August, breaching the Reserve Bank of India's (RBI) 6% tolerance ceiling. The analysts also pushed back the chances of rate cuts by the RBI's Monetary Policy Committee to February next year from October this year. Despite a moderation in underlying inflation, the RBI is expected to revise its FY24 inflation forecast from 5.1% to approximately 5.3% in the policy meeting scheduled for August 10.

Key Takeaways:

  • Nomura expects India's retail inflation to surge to 6.0-6.5% in July and August, breaching the RBI's 6% tolerance ceiling.
  • The analysts also pushed back the chances of rate cuts by the RBI's Monetary Policy Committee to February next year from October this year.
  • Despite a moderation in underlying inflation, the RBI is expected to revise its FY24 inflation forecast from 5.1% to approximately 5.3% in the policy meeting scheduled for August 10.
  • Food inflation has historically influenced inflation expectations in India, but sustained increases in food and fuel prices are usually required to significantly impact expectations.
  • The government is expected to proactively manage food inflation, and an upward adjustment in fuel prices is deemed unlikely, especially during the period leading up to state and general elections.
  • Nomura predicts a "hawkish hold" at the RBI's policy meeting scheduled for August 10, as the Monetary Policy Committee needs to be cautious about potential second-round effects.

Statistics:

  • India's retail inflation quickened to 4.81% in June, according to data released by the ministry of statistics.
  • Nomura expects India's retail inflation to surge to 6.0-6.5% in July and August.
  • The RBI's 6% tolerance ceiling for retail inflation will likely be breached.
  • Nomura expects the RBI's first rate cut to occur in February 2024 instead of the previously projected October 2023.
  • The analysts expect the RBI's cumulative cuts in this cycle to 100bp in CY2024 (from previous forecast of 75bp in H2 FY24).

Sources:

  • Nomura report on India's inflation outlook.
  • Reserve Bank of India (RBI) monetary policy announcements.
  • Ministry of statistics data on retail inflation.
  • Times Content website (https://www.timescontent.com)