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Core inflation to remain sticky at around 6%; market expects RBI to rationalise rates soon: Experts

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The consumer inflation data has come in well below 6 percent (which is the Monetary Policy Committee’s (MPC) mandate) and it is also below CNBC-TV18’s poll. The fall was largely led by food prices. Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank and R Sivakumar, Head-Fixed Income at Axis Mutual Fund, shared their outlook in an interview with CNBC-TV18.

The consumer inflation data has come in well below 6 percent (which is the Monetary Policy Committee’s (MPC) mandate) and it is also below CNBC-TV18’s poll. The fall was largely led by food prices. The one worrisome point is core inflation, that is non-food, non-fuel is still at 6 percent. Coming to the internals – what pulled the inflation down? Meat, fish, eggs are worrying, veggies not so much because this is a usual seasonal factor in the monsoons. Fuel is another important factor which is why inflation is higher.
Coming to what helped the inflation fall – the government cut the edible oil tariffs, India largely imports edible oil and that explains the fall in prices, price of pulses falling is a big positive. This also contributed to the lower food inflation. But one will have to worry about the month-on-month (MoM) momentum. What happened in May was an ugly number, when everybody sat up and took notice. MoM inflation rose by 1.26 percent. Imagine if every month that rises by 1.26 percent, one will get double-digit inflation. But in June, they realized that May was an aberration, MoM rise was only 0.18 percent, now that is too low. So people are wondering, which is normal. And now in July, we have come back to a normal 0.38 percent.
People are factoring in that MoM inflation rise this year will be 0.37 percent. At 0.38 percent, we are almost there.
The July CPI positives - the big positive is that it has come way below the poll. The poll was 5.77 percent coming in at 5.9 percent. This is one positive. Core inflation is still at 6 percent, that is the negative. We should be also worried about the wholesale price index (WPI) because that is prone to global commodity price increase and we are not seeing global steel and global copper fall much. But that worry is for a different day. That is what is also keeping core inflation high. Fuel is another thing which is keeping core inflation high. Those are the worries but largely it's a positive because it has come in below 6 percent.
Coming to the index of industrial production (IIP), this number is a very unreliable one simply because the base is distorting it. 13.6 percent is a very good number but are we growing at 13.6 percent? It is largely because of the base. And within our IIP, its electricity which is the positive factor. There is only one worry in the IIP number and that is consumer nondurables. It fell 4.5 percent. Imagine if YoY is contracted, you may want to worry whether the informal sector is doing very badly. That is the only thing I would worry about. I am just giving you the other IIP numbers just to show how inadequate it is so let's not spend too much time on this. It's completely distorted by the base. The base will become normal as we come to August, September. So at the moment, let us not worry too much about IIP, the only thing I will worry about is consumer nondurables. Is it showing that the informal sector is hurt?
Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank and R Sivakumar, Head-Fixed Income at Axis Mutual Fund, shared their outlook in an interview with CNBC-TV18.
“I would just like to point out that we were looking at a lower number of about 5.47 percent. So we were below the consensus. So this is broadly in line with what we were saying. But again, having said that, if you look at the internals, it is the food prices, which we were expecting to come down, which happened but the core inflation still remains sticky at 5.9 percent, which is just a tad below 6 percent. And as we go ahead, my fear is core inflation will remain sticky at around 6 percent,” said Bhardwaj.
“It is a good inflation that we are seeing and a very concentrated goods inflation. As we go ahead, as economy normalizes, it is the shift that we are expecting towards service inflation, which will also start bringing in the stickiness to the already elevated core inflation. So that's where my fear is that we will continue to see price pressures intact, not to forget that the producer prices, wholesale prices are still elevated, and that pass-through is still incomplete. So we do expect that as demand starts normalizing, some further pass-through is still expected in the retail inflation. So all of this does remain a worry,” she said.
“I think this was quite in line with market expectations. We saw the polls, the forecast was more or less in line with the actual numbers. So what that means is that the market was broadly pricing in this number. But it is very important they carry on from what Upasna has just mentioned about the forward view, inflation remains reasonably sticky. If RBI forecast inflation is at 5.7 percent for the full year, this will be two years in a row now that inflation will be uncomfortably close to the 6 percent mark. Now, while you are in the middle of a pandemic, you can justify higher inflation or even overshooting your inflation mandate. But if we are coming out of the second wave of COVID-19, and a forecast for the third wave seems to be relatively muted then it becomes very difficult for RBI to justify keeping rates so low,” said R Sivakumar. He further mentioned that the markets expect RBI to rationalise rates sooner rather than later.
For the full interview, watch the accompanying video.
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