Inflation Rate
- The
consumer inflation is expected to be near the upper bound of the RBI’s
inflation targeting range. Headline CPI is therefore estimated to be 6% for the
current financial year.
- As
far as inflation is concerned, the month of September was reckoned to be
critical for the current financial year as unfavorable base effect was expected
to wither away. The September print however remained elevated at 7.34%,
auguring an end to the rate cut cycle for now.
- Consumer
inflation is highly influenced by the food basket (given its weight in the
index). Due to Covid related restrictions, supply chains were severely impacted
despite healthy output. The food basket inflation rate is therefore estimated to
remain elevated and is pegged at over 10% for the current financial year.
- Protein
based items and seasonal vegetables are expected to be inflationary in non-core
categories (includes food).
- Core
inflation, which can be considered a proxy for consumer sentiment has also
shown signs of stress and is expected to breach the 5% level for the entire
financial year. Despite lower than usual demand, an elevated core inflation
suggests both input related as well as retail level inflation.
- Lower
oil prices and a favorable base effect (towards Q4 of the financial year) for
the non-core basket will be crucial in keeping the inflation rate within the
RBI’s target range.
- Given
the state of the inflation rate, a further cut in Repo and subsequent positive
impact on yields now appears farfetched.