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Rising food prices could keep the headline inflation at elevated levels in the short to medium term with Morgan Stanley expecting the consumer price index (CPI) based inflation to remain in the range of 7.1% to 7.4% in September.

Price pressures returned to the Indian economy in August, with retail inflation quickening to 7% after cooling to a five-month low in July. The increase, led by food prices, makes it the eighth month that retail inflation has stayed above the central bank’s upper tolerance limit of 6%, strengthening the case for continued monetary tightening.

“We believe that in the review on September 30, the Monetary Policy Committee (MPC) is likely to increase the repo rate 50bp, to 5.9%, with an unchanged stance. We were earlier expecting a 35bp increase, however, sticky inflation and the continued hawkish stance of DM central banks, warrant continued front loading of rate hikes, in our view. Market pricing is expecting a repo rate hike of a similar magnitude, 50 bps," Morgan Stanley said. The MPC will meet again from 28 to 30 September.

Food inflation spiked to 7.57% in August from 6.71% in July. The food and beverages category makes up 54% of CPI. Earlier this month the Centre was forced to impose a ban on broken rice exports.

However, Morgan Stanley also said that high-frequency domestic demand indicators are reflecting continued broad-based recovery. Slower global growth is reflected in a moderating trend in export growth.

“Healthy domestic demand will likely provide a partial offset to external slowdown. We project GDP growth at 7% in F23and 6.4% in F24," the report added.

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