Double hit: When growth stagnates, inflation spikes lead to higher rates

Retail inflation rose to an expected 7.79% year-on-year in April, driven by higher food and transportation prices. Food accounts for 45.86% of the index and food grain prices, which weigh about 10%, have risen behind global prices. Rising edible oil prices have accelerated following Russia-Ukraine hostilities and a ban on palm oil exports to Indonesia. Experts believe that the prices of some food items-for example, wheat পারে could rise further, with the expected deficit in domestic production now expected to be less than 111 million tonnes, and higher global prices.

Some experts think it could spread to rice. Of course, the effects of expensive inputs like fertilizer will all add to the cost of food. Inflation in transport and communications was expected to be around 11% yoy.

Of concern is that almost half of the increase in crude oil prices has gone to consumers through pump prices. Indeed, core inflation remained uncomfortably high at 7% yoy, with inflation of various items increasing, normalizing inflationary pressures. High electricity tariffs will increase the pain. There are also concerns that service inflation will begin to rise soon, and will slow as soon as paint-up demand is met.

For this reason, retail inflation may rise to the top, but it will slow down. Trajectory will largely depend on the longevity of supply-side constraints of products such as edible oil and the price of crude oil. So far, economists believe that retail inflation will average 6.3-6.4% in FY23, up from 7% in September. If inflation is really easy in the next six to seven months, then the Reserve Bank of India (RBI) may have an easier time and perhaps the terminal rate of 5.5% proposed by economists where the growth cycle may end. This would be a little higher than the 5.15% repo in March 2020 before the epidemic hit. However, this is far from the case, and in the near future, the Monetary Policy Committee (MPC) is expected to vote for a 40 bps increase in June and 35 bps in August, behind a 40 bps out-of-cycle increase. May. The MPC would be fair to do it. There is no denying the need to control inflation and to prevent expectations from being exacerbated by the effects of the second phase – higher wages and rents. Given that the RBI has released it a bit late, it will have to raise rates in large part as soon as it is caught.

The big concern is that the growth engine seems to be sputtering. Factory output grew at an annual anemic rate of 1.5% in February, on the back of a very weak base of negative 3.5% yoy in February 2021. March growth was 1.9% year on year from a high base of 24.2% in March 2021. The latter increased by 18.7% in the same month of the previous year. Worryingly, sub-segments of capital goods grew 0.7%, while intermediate products grew 0.6%. To be sure, readings are somewhat difficult to evaluate due to the base effect, especially the consumer staples and the contraction of the durable segment. Manufacturers’ comments and volume data from fast-moving consumer goods and consumer sustainable companies suggest that demand was muted in the March quarter. There are some bright spots like construction and all the data on home sales is encouraging. However, while strong companies will face storms over rising input costs, small and medium-sized companies will struggle in the informal sector. The problem is that private sector investment continues to grow at a time when Fisk is under intense pressure and the government may not be able to finance its capital plan. This could leave FY23 GDP growth at sub-7%.

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