Inflation genie out, short-term prospects are dire

Inflation based on the Consumer Price Index (CPI) reached an eight-year high of 7.8% in April, believing that the Reserve Bank of India (RBI) should have started the rate hike cycle much earlier. Last week, the RBI raised the repo rate by 40 basis points to 4.4%.

Analysts have warned that inflation across energy and core inflation will be broad-based this fiscal year. They point out that inflation has risen despite limited pass-through of producer costs.

Also, rising food inputs such as fertilizers, rising international crop prices, and extreme weather-related disruptions could push food inflation to even higher levels in the coming months. The weakness of the rupee will increase the cost of refining and importing goods.

Also, the government is ready to announce high minimum support prices (MSPs) for kharif crops in early June, adhering to the formula that the cost of paying the farm gate price should be at least 50%.

The finance ministry, however, said on Thursday that the steps taken by the RBI and the government would suppress the period of high inflation, which would be triggered by global factors. “Although inflation is expected to rise in 2022-23, mitigation of measures taken by the government and the RBI may shorten its duration. Evidence from spending patterns further suggests that inflation in India has a lower impact on low-income groups than on high-income groups, ”said the ministry’s monthly economic review.
Crisil Research writes, “We expect overall CPI inflation to rise to 6.3% in FY 2023 from 5.5% in the previous year,” and predicts that the RBI will raise the repo rate further by 75-100 bps for the rest of this fiscal year. The company expects the cost of cultivation to increase by 4-5% this year, which will increase the MSP by 3-5%. That said, wheat, edible oil and cotton are likely to see further increases in MSP. -1.62% increase in food and overall CPI.

“The rise in CPI inflation last week clearly justified the off-cycle rate hike and significantly increased the likelihood of a reversal in June 2022,” wrote Aditi Nair, chief economist at ICRA. The formulas were 6 The RBI on Wednesday said it would revise its inflation forecast in its June review. In April, it raised the inflation forecast for FY23 from 4.5% to 5.7%, which had been strengthened before the Ukraine war, including the Q1 forecast of 6.3%.

“We see the CPI inflation print of May 2022 softening to a higher base, although it will remain above 6.5%,” Nair said. Then a break to assess the impact of growth.

According to Nair, preliminary data for May 2022 showed a steady rising trend in the average prices of edible oil, barley and wheat, reflecting the fall in global supply disruptions due to geopolitical conflicts, including Indonesia’s palm oil export ban. . Moreover, the average prices of some vegetables (tomatoes, potatoes, ginger, etc.), iodized salt and fruits (apples, papayas, etc.) have risen this month despite the fall in prices of pulses, related to April 2022, he noted.

“Prices of wheat and sugar (India’s main export) and vegetable oil (a major import) have skyrocketed in the wake of the Russia-Ukraine war. Indonesia’s recent ban on palm oil exports could make the already expensive edible oil more expensive, ”according to Crisil Research.

It added that crude product prices are expected to remain high in the financial year, with Brent crude averaging $ 94-99 per barrel (33-40% higher per year) in the 2022 calendar year, or even if geopolitical tensions continue. “We anticipate that a $ 10 per barrel increase in Brent crude would raise the headline CPI by ~ 40 basis points.”

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