Economists’ take: Inflation in India to remain higher on monsoon disturbances

Retail inflation in June hit a three-month high at 4.81 per cent, due to soaring vegetable prices, higher than economists’ expectation of 4.3-4.6 per cent. While most economists believe the inflation rate certainly will remain sticky, it will not prompt the Reserve Bank of India (RBI) for another rate hike.

Meanwhile, the Consumer Food Price Index (CFPI) surged to 4.49 per cent in June from 2.91 per cent in May. Economists broadly expected this because of late start and untimely rain in several parts of the country.

Here is what economists have to say about the latest inflation reading:

Aurodeep Nandi and Sonal Varma, Nomura

With the sharp and anomalous rise in vegetable prices continuing into July, we see July inflation tracking closer to 6% levels, if the current trends persist and August may remain similarly elevated. In our view, the sharp rise in vegetable prices does not change the paradigm of a continued policy pause by the RBI.


However, higher-for-longer headline inflation, in tandem with the RBI’s recent communication of stricter targeting of 4% inflation, along with continued hawkishness by the Fed, effectively restricts the RBI’s maneuverability to respond nimbly to growth headwinds. Hence, adverse movements in near-term inflation risks delaying the first cut.

Abheek Barua, Chief Economist, HDFC Bank

Looking ahead, as the high base effect from last year fades and food prices remain under pressure, headline inflation is expected to print above 5% in July 2023. Given the emerging weather-related risks, we have revised our inflation forecast for FY24 to 5.1% (from 4.9% previously) with Q2 average at 5.3% and Q3 at 5.6%.

The balance of risks is tilted to the upside for our forecasts as sowing progress is still weaker than last year with the distribution of monsoons remaining uneven for now. The RBI is expected to keep rate elevated at 6.5% throughout FY24 and we expect rate cuts to come through only in early FY25.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The higher than expected inflation has been led by vegetables, pulses, and protein-rich items. The weather-related disruptions is expected to keep the prices of perishable food items escalated in the near term. Continued disruptions may pose 20-25 bps upside to our average fy24 estimate of 5.1%. The RBI will remain cautious on these supply side shocks but we maintain our expectations of a pause on rates through the year.

Dharmakirti Joshi, Chief Economist, CRISIL

We believe monsoon disturbances — amid already high inflation rates for certain commodities — are lending an upside to the inflation outlook.

July and August are critical months for agriculture, and we will wait to watch how rains pan out. Besides, as in the past, fiscal policy interventions via price stabilisation measures (such as release of stocks, facilitating imports, restrictions on hoarding) could be deployed to contain abnormal prices spikes.

Rajani Sinha, Chief Economist, CareEdge

The share of food inflation in the headline inflation has risen to 44% from 36% in the previous month. While a part of the increase in food prices is seasonal, for some items like vegetables, the increase is more than the seasonal pattern seen in previous years.

With high inflation for basic food items like rice, pulses, vegetables and milk, the Central Bank will be concerned about the adverse impact on household inflationary expectations. Progress of monsoon in July would be specifically critical.

If the spatial distribution of rainfall remains skewed, it could have an adverse impact on kharif sowing and further aggravate food inflation, going forward.

Tanvee Gupta Jain, Economist, UBS India

We expect sustained upside risk to food inflation over the coming months partly on seasonality in vegetable prices (especially tomatoes and onions) and the likelihood of the supply/demand imbalance persisting in the case of wheat, pulses and milk.

We expect average headline CPI inflation to move higher towards 5-5.5%YoY range in the September quarter from 4.6%YoY registered in the June quarter as weather-related risks leading to higher food prices play out. We maintain our base case view that RBI will keep rates on hold in the August policy review and retain its hawkish tone taking into account these supply-side shocks. In our base case, we expect a shallow easing cycle to commence from the March 2024 quarter, particularly if the Fed pivots.

Debopam Chaudhuri, Chief Economist, Piramal Enterprises Limited

In my opinion, RBI is cognizant about the seasonal nature of these price movements and will not deviate any significantly from its envisioned path regarding policy rates.

Economists in RBI’s Survey of Professional Forecasters expect retail inflation can rise up to 5.3% once again in Q3 FY24. My view is that inflation will continue to remain sticky at around 4.75% during Q2 and Q3, but slowing economic activity should prompt the RBI to move ahead of the curve and reduce rates by Dec’23.