Home >Markets >Mark To Market >Higher-than-expected June inflation leaves economists divided on RBI’s next move

The headline inflation number, at 6.1% in June, has breached the upper band of the Reserve Bank of India’s (RBI) inflation target. The law mandates that RBI must keep inflation between 2% and 6%, with a target to move towards 4%. The reading was higher than Bloomberg’s consensus estimate of 5.3%.

This surprise increase, as well as questions on the methodology used to arrive at this number, has economists divided on whether RBI would hit pause in its August monetary policy committee (MPC) meeting.

Like its global peers, RBI has been on an aggressive monetary easing spree, so some economists expect a status quo on rates in August. Economists at Care Ratings Ltd, for instance, are of the view that a pause may be in order in August, given surplus liquidity in the system.

Of course, as Nomura’s economists point out, the mounting risks on growth imply that the rate cutting cycle is not over yet. Nomura is pencilling in a cumulative 50 basis point (bps) additional rate cut to be delivered in October and December. One basis point is one-hundredth of a percentage point.

But also note that due to paucity of data and data collection constraints during the lockdown, official inflation figures were not released in the last two months. Moreover, the Central Statistics Office has noted that this inflation data does not meet the adequacy criteria for generating robust estimates.

So economists in the other camp aren’t reading too much into the June inflation data. They are of the view that these figures are most likely to be revised later.

Economists at Bank of America Securities Ltd said in a report on 14 July that they continue to expect a 75 bps cut by October, starting with a 25 bps cut in August.

“We continue to expect the RBI MPC to cut rates 75bp by October although June CPI inflation, at 6.1% today, came in slightly above its 2-6% mandate. Why? Inflation is still peaking off from an imputed 7.2% in April. Second, supply disruptions, due to the national lockdown, are raising prices temporarily," Bank of America Securities said in a report on 14 July.

Sharing the view, Mark Williams, chief Asia economist at London-based Capital Economics Ltd, said extreme weakness of demand will pull headline inflation back toward RBI’s 4% target by the end of the year.

With the economy still struggling, Williams is anticipating a further 50bps cut in repo and reverse repo rates (to 3.50% and 2.85%, respectively) in August. “In addition, the cash reserve ratio could be slashed and the size of the targeted long-term repo operations programme could be ramped up further," he added in a note on 13 July.

Meanwhile, apart from weak economic fundamentals, a good monsoon is likely to keep the near-term inflation outlook muted.

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