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Informist, Wednesday, Aug 7, 2024

 

By Shubham Rana

 

MUMBAI – India's headline CPI inflation likely fell below the Reserve Bank of India's medium-term target of 4% for the first time in nearly five years in July, mainly on account of a statistical effect of a high base, according to an Informist poll.

 

According to the median of estimates of 15 economists, CPI inflation in July is seen falling to a 59-month low of 3.7% from 5.08% in June. Headline inflation had risen to a 15-month-high of 7.44% in July last year. The National Statistical Office is scheduled to release CPI inflation data for July at 1730 IST on Monday.

 

Had it not been for a surge in food prices in July, inflation could have fallen even below 3.7%, economists said.

 

The base effect is such that if the overall index remains unchanged in July from the previous month, headline inflation would fall to 2.09%. 

 

Even as the headline inflation is seen falling to a multi-year low in July, the overall CPI index is likely to have risen sequentially at the fastest pace in a year.

 

An inflation rate of 3.7% in July would mean a 1.5-1.6% month-on-month increase in the overall index, which would be the highest sequential rise since July last year. The overall index had risen 2.9% on month in July last year, primarily on the back of a spike in vegetable prices, especially tomatoes.

 

A month-on-month rise of 1.5-1.6% would also be higher than the historical average sequential rise of 1.3% in July.

 

The sequential rise in the overall index in July was likely driven by an increase in the prices of vegetables and pulses, economists said. According to data from the Department of Consumer Affairs, prices of tomato surged 55.5% on month in July. Onion prices were up 20.3% sequentially last month, while potato prices increased 15.9%. 

 

"Excess rains led to crop damage, and transportation was affected following flooding in select northern and western states – which combined to raise fruit and vegetable prices," Barclays said in a note. "That said, we note that the magnitude of price rise is still small compared with the sharp spikes seen last year."

 

Changes in pulses prices were somewhat mixed in July. While prices of tur and gram rose 3.7% and 1.3% on month, respectively, those of masoor and moong fell last month.

 

Apart from food prices, economists also expect core inflation, which strips out food and fuel items, to have risen in July for the first time in 19 months. Core inflation was at a record low of 3.1% in June. Core inflation is expected to have risen due to the increase in telecom tariffs last month and a rise in gold prices, economists said.

 

"PMI (Purchasing Managers' Index) surveys indicated a rise in both input and output prices, which, coupled with small increases in wholesale prices of manufactured products suggests a rise in input price pressures," Barclays said. "This will likely be reflected in core CPI in the coming months, though we expect the core CPI inflation trajectory to remain relatively benign at below 4.5% in Oct-Mar."

 

Inflation has stayed above the RBI's 4% target since September 2019. While the central bank has projected CPI inflation to moderate to 3.8% in Jul-Sep, it is unlikely to push the RBI to lower interest rates just yet, with the Monetary Policy Committee expected to keep the repo rate unchanged at 6.50% on Thursday.

 

The central bank expects inflation to rise to 4.6% in Oct-Dec and 4.5% in Jan-Mar. Inflation is projected to average 4.5% in the current financial year started April. As such, most economists expect the RBI to lower the repo rate only in December or February.

 

Following is a summary of the poll on CPI inflation in July, with details of estimates by respondents, in ascending order:

 

Range of expectations: 3.2-4.9%

Mean: 3.7%

Median: 3.7%

Mode: 3.8%

 

ORGANISATION	CPI INFLATION ESTIMATE
Kotak Mahindra Bank	3.24%
QuantEco Research	3.27%
Barclays	3.3%
Societe Generale	3.3%
HDFC Bank	3.5%
IDFC FIRST Bank	3.5%
Motilal Oswal Financial Services	3.6%
ICRA	3.7%
Union Bank of India	3.74%
Nirmal Bang Institutional Equities	3.78%
Bank of Baroda	3.8%
India Ratings and Research	3.8%
STCI Primary Dealer	3.81%
ICICI Securities Primary Dealership	3.97%
Capital Economics	4.9%

 

End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Akul Nishant Akhoury

 

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