‘Inflation likely to be over 7% till September’

After spiking to 6.95% in March, India’s retail inflation is likely to cross 7% and stay above that mark till September, SBI economists wrote in a report on Wednesday, raising their inflation forecast for 2022-23 to 6.5% from 5.8%, citing the possibility of an ‘extended’ food price shock. 

Even after September, consumer inflation is expected to moderate only slightly to 6.5%-7%, SBI group chief economic adviser Soumya Kanti Ghosh said, adding that the first half of the year likely to see inflation above 7%, and the latter half clocking about 6.5%. Other economists, too, expect inflation to test the Reserve Bank of India’s projected average rate of 6.3% in the first quarter and 5.7% through the year.

The full effect of fuel price hikes implemented through the latter half of March is yet to reflect in the inflation data and 80% of the jump in March price trends was attributable to the food segment, DBS Group Research pointed out in a note. “Inclement weather and global commodity upmove drove prices of perishables (vegetables) higher, besides edible oils,” they wrote in a report.

“We foresee slight upside risk to the official first quarter forecast of 6.3%, contingent on international crude movements. If our forecast holds up, inflation is at the risk of breaching the upper end of the 2-6% target for three consecutive quarters, testing the policymakers’ legislative mandate,” DBS group senior economist Radhika Rao wrote in a note co-authored with senior rates strategist Eugene Leow and senior FX strategist Philip Wee.

Mr. Ghosh flagged an additional upside risk for inflation from the increase in farm input costs, which would necessitate a sharper hike in the Minimum Support Price (MSP) for crops.

“Diesel prices have increased by ₹10 in the last two weeks, fertilizer prices have surged, while labour charges have increased on an average by 4% compared to 6% in the previous fiscal. The cost of production is likely to increase by around 8-10%,” he pointed out, which could lead to a 12%-15% hike in the recommended MSP, compared with the past range of 3% to 5%.

This will escalate the hit on food price inflation and overall inflation already affected by the Russia-Ukraine conflict has significantly impacted the trajectory of inflation.

“Wheat, protein items (chicken in particular), milk, refined oil, potato, chillies, kerosene, firewood, Gold and LPG contributing to overall inflation in a substantive manner. The conflict has pushed up prices of chicken abruptly as chicken feed imports from Ukraine are getting disrupted,” the SBI report noted, emphasising that sunflower, palm and soybean oil supplies are under pressure as well.