Economists Raise India Inflation Forecast as CPI Accelerates

Economists are raising their price gains forecast in India for the year after retail inflation last month hit a 15-month high and exceeded market expectations due to a surge in food prices.

(Bloomberg) — Economists are raising their price gains forecast in India for the year after retail inflation last month hit a 15-month high and exceeded market expectations due to a surge in food prices. 

Citigroup Inc. has revised its headline consumer price outlook for the fiscal year ending March 2024 to 5.7% from 5.3%, while Barclays Plc. raised its estimate to 5.4% from 5%, incorporating a likelihood of an elevated reading in August. Goldman Sachs Inc. sees inflation for the current year to average at 5.8%, from 5.6% earlier.

READ: Modi Seeks to Fight Inflation With Polls Nine Months Away 

“Sharp swings in vegetable prices have made it difficult to forecast quarterly inflation profile,” Citigroup economist Samiran Chakraborty wrote in a note late Monday. “This turnaround in the inflation scenario is likely to open-up the discussion around possibility of rate hikes from the RBI.”

Prices of some of the most commonly used vegetables in Indian households, including tomatoes and onions, have more than doubled in the last few months after uneven rains and floods in some parts of the country affected supplies. Data released Monday showed food inflation, which accounts for nearly half of the overall consumer price basket, hit 11.51% in July, the highest level since April 2020, while vegetable inflation rose 37.34%. 

The Reserve Bank of India held its key rate at 6.50% for a third straight meeting and raised its inflation forecast to 5.4% from 5.1% earlier, citing food prices.

Vegetable prices have shown a sustained gain in the first thirteen days of August, driven by costs of tomatoes, said Goldman Sachs economist Santanu Sengupta. He pegged headline CPI inflation in August at around 7.8%. 

Economists also expect the central bank to be cautious in easing borrowing costs amid accelerating inflation. Citigroup has pushed back their first rate cut call to June 2024, compared to April earlier. 

What Bloomberg Economics Says

“The RBI said in its August review that it will tolerate higher food inflation, which it sees as transitory, for sometime. Even so, the magnitude of the upside surprise raises the risk of the next move by the central bank being a rate hike. We will soon review our call for a hawkish hold by the RBI until 1Q24.”

– Abhishek Gupta, India Economist

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India’s rate-setters promised to tolerate the immediate vegetable price increase but if those prices don’t normalize by December or other new supply side shocks emerge, then “looking through” might not be an option, Chakraborty said. 

“The RBI would definitely want to avoid 3 consecutive quarters of the 6% breach happening in both FY23 and FY24 which would dent their credibility,” he said. 

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