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economy | IST

Surprised by August CPI inflation at 5.3%, economists discuss expectations from RBI

Anand Bagri, Head - Domestic Markets, RBL Bank is of the view that with the trajectory of inflation that is being projected over the next couple of months, it would now breach the 5 percent mark by December and would give a huge leeway for policymakers to focus on growth and keep the policy rates where they are as of now.

The retail inflation for the month of August came in at 5.3 percent mainly due to easing food prices according to official data. The retail inflation based on the Consumer Price Index (CPI) was 5.59 percent in July and 6.69 percent in August 2020. Meanwhile, the Reserve Bank (RBI) had kept the key interest rates unchanged in its monetary policy review in August. The central bank mainly focuses on the CPI while deciding its bi-monthly monetary policy.
Sameer Narang, Chief Economist, Bank of Baroda, DK Joshi, Sr. Director & Chief Economist, CRISIL Limited, Anubhuti Sahay, Head, South Asia Economic Research (India), Standard Chartered Bank, and Anand Bagri, Head - Domestic Markets, RBL Bank discussed with CNBC-TV18 the August CPI inflation and the expectation from RBI.
Joshi said the number is a very pleasant surprise because they were expecting 5.7 percent.  “Although the inflation has positively surprised, you cannot lower your guard because there are underlying pressures - the crude prices continue to remain high, supply-side bottlenecks continue to play out, the chip shortages are feeding into the auto sector, the global freight -- the Baltic Dry Index is three X of what it was in January and companies are trying to pass on the costs,” he explained. 
There will be some underlying pressure, which will continue, Joshi said, adding that food will be the key for this year's inflation. From April to July, the food inflation averaged 4 percent and in August, it has come to close to 3 percent.
About 60 percent of the entries in the CPI food basket are lower on a month-on-month basis. On a month-on-month basis, cereals are lower, just a little, but still lower. Meat and fish are substantially lower, then eggs are lower, milk is kind of flat, fruit is a little lower, vegetables are flat while pulses are a little bit lower. Most of the big entries in the food basket are lower, barring perhaps oil and fats, so that's clearly a very big positive. So is the inflation fear now well and truly reduced?
Narang said this perhaps will continue till December, as there is a large base effect sitting for last year's numbers. The vegetable index actually turned negative only at the starting point of the calendar year and it fell into double digits for a long period of time last year because of the supply-side shock last year due to the pandemic.
“What we are going to see is perhaps a positive surprise, led by food inflation, our number this month was 5.45 percent, so we are surprised at 5.3 percent and largely driven by food. Perhaps this will continue for the next few months as well and then give some comfort to the market as well as RBI from a policy perspective," said Narang.
When asked how he expected bond yields to react to the inflation figure, Bagri said it has beaten all expectations. So possibly 5.3 is a number which would greatly surprise the market and be a huge positive. 
“Possibly, what we would see is bond yields reacting. There was a selloff in the market in the last couple of days and possibly we would see that that sell-off is retraced and we would be back to around 6.10-6.15 percent levels,” he said.
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With the trajectory of inflation that is being projected over the next couple of months, Bagri believes that it would breach the 5 percent mark by December and give a huge leeway to the policymakers to basically focus on growth and keep the policy rates where they are as of now,” Bagri said.
He added that the RBI governor was also very categorical in his last interaction with the media. This inflation is basically because of the supply-side factors that inflation is expected to mellow down substantially. “So it is in line with their expectations and in line with their estimations. Therefore, it gives a huge leeway to them also,” he said.
For the entire discussion, watch the accompanying video