CPI and IIP numbers : We are tracking July inflation at 6.7-6.8% Says Ms. Madhavi Arora, Emkay Global Financial Services
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Perspective on CPI and IIP numbers By Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services
“The sequential easing in retail inflation in June reflects the full impact of excise cut in motor fuels. This was also helped by other fiscal measures namely cut in import duties on a few imported food products, and a possible easing in domestic edible oil prices amid moderation in vegetable oil prices globally. Mandi prices are showing further correction which along with easing in world food prices should bring down food inflation ahead. However perishables may need a watch owing to seasonality. Core inflation (ex food, fuel and intoxicants) looks to be largely unchanged albeit reflecting easing momentum in T&C helped by easing motor vehicle fuel prices even as other components showed a sequential gains. We are tracking July inflation at 6.7-6.8%, with quarter avg around 7%. This is already baked in the RBI’s forecast, which is slightly higher than our estimates.
We maintain our FY23 CPI inflation estimate at 6.5% with a mild downward bias (RBI: 6.7%). FY23 could see rates go up by 75bps+, with the RBI now showing its intent to keep real rates neutral or higher to quickly reach pre-Covid levels. Our Taylor’s estimate shows a maximum tightening of the policy rate by 6% by FY23, of which liquidity tightening to 2% of NDTL is tantamount to another estimated 25bps effective rate hike. However, the front-loaded rate hike cycle does not imply a lengthy tightening cycle, and once they reach the supposed neutral pre-Covid monetary conditions, the bar for further tightening may go higher incrementally amid increasing growth and inflation trade-offs. We reckon that amid the persisting slack, the flat Phillips curve may call for a larger output sacrifice to contain inflation. A judicious policy mix is needed as economic agents share the burden of the global shock. The countercyclical fiscal shield can be effective while the monetary sword takes hold.”
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