India's retail inflation may be at 5.7-6.9% in FY23, say economists

This is after duty cuts on fuel; 25-50 bps repo rate hike likely in the MPC meet next week

After hiking the repo rate by 40 basis points (bps) in its off-cycle decision, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) is likely to decide on the exact rate hike on the basis of its inflationary expectations at that point of time.

Retail inflation touched a near eight-year high of 7.79 per cent in April. This is a fourth straight month when the rate of price rise has been above the MPC's six per cent upper tolerance level.

On the other hand, wholesale price index (WPI) inflation zoomed to a series high of 15.1 per cent that month. Some part of it could spill over to CPI in the months ahead.

After the Centre’s decision to slash excise duty on petrol by Rs 8 a litre and by Rs 7 a litre on diesel, economists revised their earlier projections on retail inflation slightly downwards. They, however, believe that the rate will remain elevated.

For instance, HSBC chief economist India Pranjul Bhandari now said CPI will still likely average well above the RBI’s 6 per cent upper tolerance limit in FY23.

She said the oil pump price cuts will lower inflation by 0.2 percentage points directly and by an overall 0.5 percentage points over time. This comes as lower costs feed into food and core inflation.

Before the excise duty cuts, she had said the rate would be over 6.8 per cent.

India Ratings chief economist Devendra Pant expects retail inflation to average at a nine-year high of 6.9 per cent in FY23.

Bank of Baroda chief economist Madan Sabnavis now believes CPI inflation rate is likely to average around 5.8 per cent this fiscal year. Earlier, he had pegged it at about six per cent.

RBL Bank chief economist Rajni Thakur pegs inflation rate at 5.75 per cent for FY23 against six per cent projected earlier.
 

ICRA chief economist Aditi Nayar said the high WPI inflation is being driven by commodity prices. This will keep CPI inflation sticky until the conflict (Russia-Ukraine) subsides, although the excise cuts on fuels are a welcome relief. She sees CPI inflation averaging at 6.5 per cent this fiscal year.

Ranen Banerjee, government sector leader, PwC India, projects the CPI inflation rate to average about 6.5 per cent.

Sabnavis thinks CPI inflation will be about 6.4 per cent in Q1, 5.8 per cent the following quarter, 5.5 per cent in the third quarter and 5.3 per cent in the fourth quarter.

QuantEco Research chief economist Shubhada Rao said, “Notwithstanding the excise cut, we continue to hold on to our FY23 CPI inflation expectation of 6.1-6.3 per cent, but with risks evenly balanced now (versus upside risks earlier).”

MPC’s likely moves

Nayar said the excise cuts have distinctly lowered the probability of highly front-loaded rate hikes.

“We expect the MPC to hike the repo rate by 40 bps in the June review and 35 bps in the August review. That will revert us to the pre-pandemic level of the repo rate," she said.

Bhandari said she expects the MPC to hike the repo rate by another 40 bps in June, taking it to 4.8 per cent.

“Thereafter, we expect the RBI to move to a series of lower quantum repo rate hikes of 25 bps each, taking the repo rate to 6 per cent by mid-2023,” she added.

Pant believes the MPC will raise the policy rate by at least 75 bps in the rest of FY23 — 50 bps in June and another 25 bps in October.

“The hike could also be 100-125 bps (during the rest of FY23), but this will depend on incoming data, policy actions by global central banks, global geopolitical situation and its spillover effect on the Indian economy,” Pant added.

Along with it, the cash reserve ratio could also be hiked by 50 bps to 5 per cent by FY23-end, he said.

Thakur believes the MPC will hike the repo rate by a total of 100 bps over next two meetings in June and August.

“This will bring the repo rate to 5.40 per cent, a little above the pre-Covid level of policy rates. The base case expectation is for the RBI to opt for a 50 bps hike in each meeting. However, given the urgency to manage price pressures currently, a more aggressive 75 bps hike in June, followed by 25 bps hike in August can’t be ruled out at this time,” she added.

Banerjee expects a 50 bps increase in repo rate in the June MPC meeting. “The subsequent actions will be data dependent and mirror the pace of rate increases by the US Fed with a lag,” he added.