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Q2 inflation may undershoot RBI target of 7.1%: Economists

13 Aug , 2022   By : Monika Singh

Q2 inflation may undershoot RBI target of 7.1%: Economists

A moderation in global commodity prices, on top of a raft of supply-side measures and monetary tightening, weighed down retail inflation to a five-month low of 6.71% in July, amid expectations that price pressure may remain around this level in August, despite a waning favourable base effect.

This means inflation, based on the consumer price index (CPI), will likely undershoot the central bank’s 7.1% forecast for the second quarter unless the easing commodity price trend reverses dramatically, some analysts said.

Retail inflation in July dropped below 7?ter a gap of three months, as price pressure in the core and food segments decelerated, offsetting a rise in inflation in the fuel and power segment.

Aditi Nayar, chief economist at Icra, said, “Given the base effect, we caution that the next two CPI inflation prints could rise slightly from the 6.7% seen in July, in spite of which we believe that the average inflation for the ongoing quarter will modestly trail the MPC’s projection of 7.1%.”

Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peaks seen in mid-June, which bodes well for easing domestic input cost pressures and the core-CPI inflation in the next few months, she said. “In contrast, the robust domestic demand for services poses risks, given its significant share in the CPI basket (services: 23.4%), and hence, remains a key monitorable, along with the significant lag in kharif sowing of rice,” Nayar said.

Earlier this month, the central bank retained its full-year CPI inflation forecast at 6.7%. It projected inflation at 7.1% for Q2, 6.4% for Q3 and 5.8% for Q4. Inflation in the June quarter, too, had undershot the central bank’s projection by 20 basis points and settled at 7.3%.

Economists at India Ratings said, “Cooling of global crude prices lately is being felt on inflation in the transport and communications segment (135-basis point decline in July over June), but weak currency is limiting its impact on domestic inflation. Inflation of miscellaneous group (mainly services, second highest weight after food in CPI basket) has fallen below 6?ter a gap of 25 months.” However, base effect will remain unfavourable until October and continue to exert pressure on inflation, they said.

Crisil chief economist DK Joshi said the gradual easing of inflation suggests there remains some pressure across major categories despite the recent fall in global prices, and benefits from the government’s tax cuts on certain items. “Food inflation faces risks from lower rice sowing, tight wheat supplies, and elevated input costs. Cost pressures have eased for producers with the recent fall in international commodity prices; they are expected to increase passthrough of these pressures to retail prices with recovering demand. The RBI’s latest surveys of manufacturing and services firms corroborate this,” Joshi said.

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