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The retail inflation, based on consumer price index, was at a six-year high of 7.61% in October, while wholesale price-based inflation rose to a eight-month high of 1.48%. Inflation remained above the central bank 2%-6% target range for the seventh straight month. However, fund managers draw some respite from the fact that the high inflation was backed by spike in food prices, gold and oil.

Food inflation went up to 11.07% from 10.68%, the highest since January. Prices of vegetables jumped 22.51%, egg 21.81%, meat and fish 18.7% and pulses 18.34%.

They believe the arrival of winters should ease the price and bring down the inflation numbers considerably. Here is what the fund managers said:

Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund

The current inflation issue is more supply-side driven. Within COI itself, the internals reflect that a lot of it is driven by food articles and perishables. First, we had the issue of nationwide lockdowns followed by regional/local and sporadic lockdowns in various parts of the country. Food articles, which need efficient transportation to their nearest markets, were impacted heavily. This was followed by an exceedingly wet October which saw above-average rainfall in most parts of the country. This further affected crops such as onions severely, leading to a surge in prices. In general, we have also seen the prices of protein items such as milk, meat, pulses move up during this period.

We expect food inflation to start coming off through gradually beginning December. Since a large part of the inflation pick up was led by a narrow basket of items, we should begin to see the impact on headline numbers as well.

Other than this, through April, May and beyond, we have seen firm prices in items such as gold, fuel, medical services – all of which have impacted inflation. Fuel has stabilised with oil in the USD 40-45 / barrel range. With a gradual lifting of lockdown, some part of regular medical services is easing as well. Average inflation for FY21 is likely to stay around 6% and higher than the RBI forecast. However, RBI has shown higher tolerance for high inflation thus far, seeing it mostly as a temporary spike which is likely to cool off in the next few quarters.

We expect monetary action and stance to remain calibrated and non-reactive at this stage given RBI’s medium-term agenda of pushing through rate transmission. It is also likely that the new MPC will target flexible inflation targeting regime, to maintain CPI within the band of 2-6% rather than a fixation at the mid-point, i.e. 4% as was the case with the previous MPC.

Mahendra Jajoo, CIO-fixed income, Mirae Asset

Headline inflation print has been on the higher side for quite some time and expectations of any sharp decline has so far been belied, notwithstanding significant opening up of the economy and a strong rebound in activity levels. While the headline print is still expected to ease in coming months as supply chains are further debottlenecked and a favourable base effect works its way through, the revised numbers increasingly look unlikely to settle in the RBI’s target band anytime soon. However, drawing comfort from the rise in inflation being dominated by food and fuel component and with an expectation of a sharp correction downwards in its projections, RBI has indicated to maintain its accommodative stance. As such, the impact on bond yields may not be very significant as long as monetary policy stance remains supportive.

Avnish Jain, fixed-income head, Canara Robeco Mutual Fund

While inflation in recent times has been higher than RBI’s upper band of 6%, it is on back of higher than expected food inflation. The lockdown and subsequent disruptions of supply chains impacted prices of essential items. Further, unseasonal rains in the recent past impacted standing crops keeping food inflation unreasonably high. However, it is expected that the arrival of winter crop should ease prices. Also government increased excise duty on fuel, which had an impact on fuel inflation but this was a one-time impact. Global oil prices continue to remain under pressure as oil demand gets hit on back of pandemic induced global slowdown, which should likely keep a lid on fuel inflation going forward. Going forward, it is expected that with contraction in GDP, demand driven inflation should continue to moderate. Market participants perceive the recent surge in inflation as transitory and the same has been opined by the policy makers as well. Bond yields have been on a downtrend driven by dovish RBI policies as well excess liquidity and it is expected that rates are likely to remain lower in the near term.

Vivek Sharma, fund manager – fixed income investments, Nippon India Mutual Fund

The headline numbers have continued to exceed market expectations in food and non-food both. From a medium term perspective though, aggregate demand conditions may not create a big challenge and we expect inflation to revert back to the 4.5%-5% range in the next few quarters.

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