Retail inflation based on Consumer Price Index (CPI) is likely to have surged to around 5 per cent in September on account of base effect, combined with rise in food prices. If so, the inflation rate would cross 5 per cent after June.
The government will make inflation data public on Monday.
Retail inflation was below 4 per cent for last two months – July (3.6 per cent) and August (3.7 per cent). This raised the hope for policy interest rate revision. However, considering higher inflationary expectation, the Monetary Policy Committee kept the rate unchanged earlier this month. Following the policy stance, apart from unexpected rise in food prices, volatile global situation is affecting crude and commodity prices and that is also likely to impact headline inflation.
The first indication about higher inflation came from the RBI Governor Shaktikanta Das’ statement after the MPC meeting. He said: “The CPI print for the month of September is expected to see a big jump due to unfavourable base effectsand pick up in food price momentum, caused by the lingering effects of a shortfall in the production of onion, potato and chana dal (gram) in 2023-24, among other factors.” It may be noted that MPC is mandated to follow targeted inflation range, which is 4 per cent, with a swing of 2 per cent in each of the directions. The median rate is 4 per cent and if the rate lies below 4 per cent on sustainable basis, there is strong possibility of rate cut. However, the possibility of rate cut in near term appears to be low.
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A report prepared by Shreya Sodhani, Regional Economist at Barclays, concurred with the RBI Governor. “We forecast CPI inflation accelerated in September, as base effects reversed. Momentum in retail prices appears contained, especially for food.” Further, the report estimated that CPI inflation is likely to have picked up pace to 5 per cent in September. “The acceleration was likely driven largely by a reversal of base effects, which had earlier dragged inflation below 4 per cent over July-August,” it said, adding that sequential price pressures are expected to be relatively muted.
Sodhani sees moderation in food inflation from October onwards. “Momentum seems broadly contained, and with the kharif harvest likely to hit the markets in the coming weeks, increased supply of non-perishables may bring down elevated food inflation from Q3,” the Sodhani report said. Das thinks overall inflation rate is expected to come down from next quarter (January-March). “The headline inflation trajectory, however, is projected to sequentially moderate in Q4 of this year due to good kharif harvest, ample buffer stocks of cereals and a likely good crop in the ensuing rabi season,” he said.
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Still, he has listed some risks too, though the risks are evenly balanced. “Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation. International crude oil prices have become volatile in October. The recent uptick in food and metal prices, as seen in the Food and Agricultural Organisation (FAO) and the World Bank price indices for September, if sustained, can add to the upside risks,” he said.
