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India’s retail inflation is expected to remain uncomfortably high in the current fiscal and may touch its highest annual print under the Narendra Modi government despite the Centre’s efforts to tame stubborn price pressure through tax cuts.

A median of projections by eight brokerages puts inflation at 6.7% in 2022-23, sharply up from the previous year’s 5.5%.

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Inflation

The projected print would surpass even the pandemic-led high of 6.2% in FY21 and continue to burn the pockets of consumers as the inflationary pressures from rising food prices, supply-chain disruptions, and pass-through of input costs are far from over.

Following the Centre’s announcement on Saturday of a sharp cut in excise duty on fuel, increases in fertilizer and cooking gas subsidies, and cuts in customs and import duties on certain raw materials, several economists left their inflation estimates for the full fiscal unchanged. Some did prune projections by up to 40 basis points, but the overall expectations remained above the Reserve Bank of India’s (RBI’s) upper tolerance bound of 6%.

The estimates were in the range of 6.1-7.2%. They are much higher than RBI’s estimates in its April meeting, seeing retail inflation at 5.7% for this fiscal, with the print progressively improving each quarter.

Inflation had come in at an eight-year high of 7.79% in April, with food and beverage inflation even higher at 8.1%.

The excise duty cuts of 8 per litre on petrol and 6 per litre on diesel by the central government, on top of the cuts announced in November, do reverse the pandemic-era hikes but may not be enough to have a substantial impact on inflation outlook due to the sharp rise in crude oil prices, which have doubled to $110 per barrel over the year, particularly since the Russia-Ukraine war began.

Even as the oil marketing companies passed on the cuts, petrol and diesel prices are still hovering around 90-110 per litre in different cities. And the prices may be hiked soon. “It is worth noting that the freeze in fuel prices in January-March, despite escalating global oil prices, led to steep under-recoveries for oil marketing companies," said Nomura in a recent note. As the under-recoveries, or selling fuel below cost, are continuing, retailers may begin to raise prices again after having passed the benefit of lower excise duties, it added.

“While a bold step to address the cost-push side of the inflation is a welcome development, steps to address the supply-side of the inflationary leg are awaited," said Siddharth Kothari, an economist at Sunidhi Securities and Finance Ltd.

The recent measures announced by the government may take some pressure off the central bank, which had already embarked upon policy normalization earlier this month. However, the recent announcements are not expected to change the course of the RBI’s actions, as economists continue to see a hike of at least 75 basis points as soon as August to restore the policy repo rate to the pre-pandemic level of 5.15%.

RBI governor Shaktikanta Das told CNBC-TV18 in an interview on Monday that another rate hike is a “no-brainer".

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