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MUMBAI : A declining core inflation, amid a 15-month high retail inflation, gives no reprieve to the Reserve Bank of India (RBI), which recently called for supply-side interventions to cushion food price shocks.

Inflation, without accounting for food and energy prices, known as core inflation, stood at 4.9% in July, as against 5.1% in June. Economists believe it will remain sticky in the coming months. They said that while a decline in core inflation is positive, high headline numbers have anyway dashed rate cut hopes in FY24.

Headline consumer price index (CPI) inflation rose to 7.4% in July, from 4.8% in June as against a Bloomberg consensus of 6.5%. This was higher than RBI’s flexible tolerance band of 2-6%, a range retail inflation breached after a gap of five months.

“We think core inflation is likely to remain sticky at around 5% in the near term, as demand remains resilient,” Barclays said on Monday.

Barclays raised its FY24 inflation forecast again to 5.4%, from 5% earlier, taking into account higher-than-expected July CPI and likely elevated August numbers.

However, by September, it expects CPI inflation to come back to the RBI’s tolerance band, saying there is room for CPI to even fall below 5% by the end of 2023.

RBI governor Shaktikanta Das said on 8 June that a durable disinflation in the core component would be critical for a sustained alignment of the headline inflation with the target.

Others said food inflation requires supply-side measures, which puts it beyond the ambit of monetary policy.

“Though the moderation in core inflation is reassuring, the possibility of elevated headline numbers in the upcoming months has pushed the expectation of a rate cut by the RBI to the next fiscal,” economists at Care Ratings said.

They added that among non-food components, there was broad-based moderation in inflation across categories which helped lower core inflation. On food inflation, the effectiveness of government measures — including allowing imports of tomatoes from Nepal, sale of tomatoes at subsidized price and release of onions from buffer stocks — in bridging the demand-supply gap is yet to be seen, they said.

The RBI has sounded a hawkish note in the recent policy announcement, pointing to how instances of recurring food price shocks pose a risk to anchoring of inflation expectations.

“The role of continued and timely supply side interventions assumes criticality in limiting the severity and duration of such shocks. We have to stand in readiness to go beyond, keeping Arjuna’s eye to deploying policy instruments, if necessary,” said Das.

According to Radhika Rao, senior economist, DBS Group Research, the jump in near-term inflation aligns with the cautious comments from the RBI MPC, but the central bank would have to remain vigilant about spillover risks into core readings and inflationary expectations.

“The August print assumes importance in this mix, with a sharp upside there not only necessitating a sharp revision in the official Q2 FY24 inflation estimate but also raising the risk of reciprocal tightening measures. Focus will be on administrative measures and seasonal correction in selected perishables in the interim,” said Rao.

Some experts expect the bond markets to react to the adverse CPI numbers. “The 10-year yields can touch 7.25% levels when the market opens on Thursday unless we get some statements from the finance ministry or RBI on how they intend to control CPI inflation in the coming days,” said Murthy Nagarajan, head of fixed income, Tata Mutual Fund.

Bond yields and prices move in opposite directions.

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Updated: 15 Aug 2023, 09:51 PM IST

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