India August inflation preview: India’s August inflation may be significantly above RBI’s 2-6% target range

India retail inflation likely eased to 7 per cent in August from July's 15-month high of 7.44 per cent, but experts expect it to remain above the Reserve Bank of India's target range of 2-6 per cent.

Nishant Kumar
Updated12 Sep 2023
Experts are of the view that retail inflation in the range of 7-7.4 per cent will not upset the stock market. Photographer: Dhiraj Singh/Bloomberg
Experts are of the view that retail inflation in the range of 7-7.4 per cent will not upset the stock market. Photographer: Dhiraj Singh/Bloomberg(Bloomberg)

India retail inflation most likely eased in August on a monthly basis on a fall in vegetable prices but experts believe it will remain significantly above the Reserve Bank of India's (RBI's) target range of 2-6 per cent. Official data on retail inflation will be released on Tuesday (September 12).

According to the median of estimates by 18 economists in a Mint poll, India’s retail inflation likely eased to 7 per cent in August from July’s 15-month high of 7.44 per cent. The poll predicts Consumer Price Index (CPI) will range between 6.8 per cent and 7.3 per cent, with six economists giving the 7 per cent figure, and only four seeing it lower.

Read more: Inflation likely eased in August

The CPI inflation shot up to a much sharper-than-expected 15-month high level of 7.44 per cent in July 2023 from 4.9 per cent in June 2023, due to sharp rises in the prices of vegetables and some other food items such as pulses, spices and cereals. Excluding vegetables, the increase in the CPI inflation print was relatively tolerable, to 5.4 per cent in July 2023 from 5.2 per cent in the previous month. Moreover, the core CPI (CPI excluding food and beverages, fuel and light and petrol and diesel) eased to a 21-month low of 5.1 per cent in July 2023.

Read more: Mint Explainer: Why is retail inflation at a 15-month high?

Rising crude oil a major concern

The recent sharp rise in crude oil prices has added to the worries about inflation. Brent Crude continues trading above the $90 per barrel mark due to supply constraints.

Crude oil prices have risen in the last two consecutive weeks with Brent Crude prices rising to their highest level since November. Oil prices are rising as major oil producers Saudi Arabia and Russia last week announced the extension of their voluntary supply cuts of 1.3 million barrels per day until the end of this year.

G. Chokkalingam, Founder and Head of Research at Equinomics Research expects August inflation to be around July's high level of 7.4 per cent due to a rise in oil and crop prices.

"Elevated inflation rate due to rising crop and oil prices, declining goods exports, lack of significant growth in FDI inflows, solid outward remittances, etc. remain as cause of concern for the markets in the short-term," Chokkalingam said.

On the other hand, Deepak Jasani, Head of Retail Research at HDFC Securities said inflation in India was likely to have fallen in August to 7.1 per cent from a 15-month high of 7.44 per cent in July, led by cooling vegetable prices. But it will still be above the upper end of the Reserve Bank of India's 2-6 per cent target for a second month.

"Subsidised vegetable prices and banned exports of some cereals, provided temporary relief to households. Rising energy prices, however, could limit the decline and need to be watched closely. Erratic monsoon season could keep alive the risks to inflation over the next few months. The key risk is for pulse prices, with sowing down by about 9 per cent year-on-year and erratic monsoons. However, some more easing in CPI in September could be seen aided by subdued food inflation," said Jasani.

Market outlook

Experts are of the view that retail inflation in the range of 7-7.4 per cent will not upset the market as it is widely expected. However, a sharp upside in inflation print can trigger a short-term correction.

Some analysts pointed out that core inflation, which excludes the volatile food and fuel prices, is still low so the RBI may not go for rate hikes in the coming policy meeting in October.

However, a weak monsoon, steep rise in crude oil prices, selling by the FIIs (foreign institutional investors) and rich valuations of many small and mid-cap (SMC) stocks are matters of concern.

Chokkalingam pointed out that the overall market capitalisation has crossed 320 lakh crore, which is around 107 per cent of the estimated FY2024 nominal GDP of India. Sensex’s trailing PE also stands at 24.3, significantly above the long-term average PE.

Further, Chokkalingam added that there is a flood of IPOs which are taking away financial resources from the investors.

"Many promoters have sold some of their stakes in the markets and some loss-making companies have mobilised resources through rights issues. We believe that soon we might see a shortage of liquidity to support the SMC stocks on the secondary markets. If we look back at the history of the last 30 years, many steep corrections in the small-cap space happened after a massive rally in the IPOs," Chokkalingam said.

"Another possible risk factor to the markets is forthcoming state elections in Rajasthan and Madhya Pradesh. If any sentimental impact happens to the stock markets, then it would be very difficult to find liquidity to support the markets, especially for the SMC stocks," said Chokkalingam.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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