Food inflation to drive up India’s CPI to 6.2% in Sep quarter: Morgan Stanley

  • Despite its core inflation forecast for India remaining unchanged, Morgan Stanley maintains the base case of a shallow rate cut cycle from January-March 2024

Rhik Kundu
Published2 Aug 2023, 03:26 PM IST
Food inflation accounts for nearly half the CPI or consumer price index basket
Food inflation accounts for nearly half the CPI or consumer price index basket(REUTERS)

New Delhi: Morgan Stanley on Tuesday said it expects India's retail inflation to leap to 6.2% at the end of the quarter ended September, against its previous forecast of 5.5%, due to higher food inflation. 

The Consumer Price Index (CPI) based inflation is, however, expected to moderate to a 5-6% range during the second half of FY24.

The investment banking and financial services major said that despite its core inflation forecast for India remaining unchanged, it maintains the base case of a shallow rate cut cycle from January-March 2024. It also expects the recent trend in inflation to undergo broad-based moderation, and a possibility of a delayed start in the rate cut cycle.

In a report titled 'Assessing Risks to Inflation Trajectory', Morgan Stanley said it expects India's CPI inflation during July to be around 6.2-6.4%.

"The upside is primarily being driven by (an) increase in food inflation, mainly reflecting higher inflation in vegetables and somewhat in pulses and cereals. We expect core inflation to remain unchanged and largely range bound around 5.0-5.2%," the report said.

"Beyond QE (quarter ending) Sep-23, we expect inflation to track between 5-6%, driven by changes in food inflation. Indeed, vegetable prices tend to be volatile with a short cropping cycle and can potentially correct swiftly," it added.

Morgan Stanley now expects inflation during FY24 to average 5.4%, against the previous estimate of 5.2%.

India's retail inflation, which cooled steadily for four months, leapt to a higher-than-expected 4.81% in June, driven by rising food and vegetable prices.

However, June’s retail inflation remains within the central bank’s upper tolerance band of 6%, but above the 4% medium-term target.

Food inflation measured by the Consumer Food Price Index, which accounts for nearly half of the overall consumer price basket, rose to 4.49% in June 2023 against 2.96% (revised) in May 2023. Other economists have also cautioned that inflation could cross 5% in the next two months on a continued rise in prices of vegetables, pulses and cereals.

"Even as we expect headline inflation to track somewhat higher than our previous expectation, we believe that the underlying trend in inflation remains unchanged, as reflected in core inflation forecasts," the Morgan Stanley report said.

"As such, we maintain our base case of a shallow rate cutting cycle from 1QCY24. Risks of a delayed start to the rate cutting cycle could emerge if the trailing (i.e., headline) inflation in QE Dec-23 remains above 6% (our current forecast is 5.7%)," it added.

The report said that key risks in the near term stem from volatility in food inflation and changes in global commodity prices.

"While these risks remain cyclical, risks to core inflation pressures stemming from faster-than-expected domestic demand conditions can change the underlying inflation trajectory," it added.

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First Published:2 Aug 2023, 03:26 PM IST
HomeEconomyFood inflation to drive up India’s CPI to 6.2% in Sep quarter: Morgan Stanley

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