PTI | New Delhi | Updated on: Jun 13, 2022

CPI could be hit by crude price movement, extent of Re depreciation

Retail inflation based on the Consumer Price Index (CPI) eased to 7.04 per cent in May from 7.79 per cent in April.

Two factors played an important role in bringing down inflation in May from April’s eight-year high. The first was impact of fuel duty cut on prices, and the second, a favourable base effect, as the rate of retail inflation in May 2021 was 6.3 per cent. May saw prices of pulses, edible oils, and eggs dip, and the inflation in the service sector moderate.

Major risks

However, there are two major risks to retail inflation — a rise in global crude oil prices and the depreciation of the rupee against the US dollar. Accordingly, it is estimated that the inflation rate for June could be around 7 per cent which is above the RBI’s tolerance level of 6 per cent.

This means policy interest rate, better known as the repo rate, will see more hikes.

Swati Arora, Economist with HDFC Bank, expects inflation to average 7.2 per cent in H1 (April-September) of FY 23 and ease to 6.2-6.3 per cent in H2 assuming crude oil prices at $105/barrel. For the full current fiscal, she expects the CPI to average 6.7 per cent, with upside risks from prolonged supply-side disruptions and depreciation of the rupee leading to higher imported inflation.

“The broad-based nature of the increase in inflation and the rising risks of the second-round impact on inflation expectations make a case for an aggressive monetary policy by the central bank. We expect the RBI to raise policy rates to 5.75-6 per cent by the end of FY23,” Arora added.

Impact of tightening

A note prepared by Sunil Kumar Sinha and Paras Jasrai of India Ratings and Research says the full impact of monetary tightening impacts the real economy with a lag of 6–9 months. On its part, the Centre announced an excise duty cut on petrol and diesel on May 22.

Its impact on inflation will be felt much faster than the RBI’s rate cut, but will be visible only in June and thereafter both through direct and indirect channels.

Furthermore, it said that , as prices of goods and services that once go up show downward rigidity, the second round of duty cuts on petrol and diesel will be somewhat muted.

Wage-price spiral looms

Rajani Sinha, Chief Economist with Care Edge, expects the CPI to remain sharply above the RBI’s upper tolerance limit the next few months owing to elevated crude and commodity prices. Also, with an expected improvement in the employment situation, there is a risk of a wage-price spiral setting in that would make the task of reining in inflation even more difficult. In the second half of the fiscal, “we could see some cooling of price pressures owing to control measures taken by the RBI and the government,” said Sinha.

“Robust kharif output helped by a conducive monsoon could ease food prices to a certain extent. A likely slowdown in the global economy will also limit the upside for inflation.

“Considering all these factors, we estimate the CPI inflation to average 6.5 per cent in FY23, with an upward bias,” Sinha said

Published on June 13, 2022