Consumer Price inflation: Inflation set to overshoot RBI’s target in July, August on high vegetable prices: Nomura

2023-07-21 13:22:52

Consumer price inflation is expected to overshoot the Reserve Bank’s tolerance mark of 6 per cent once more in July and August due to the sky high vegetable prices, a Japanese brokerage said on Friday. The government, which banned non-basmati rice exports earlier this week, is likely to usher in more supply-side measures to tame the price rise going forward, Nomura said in a note.

“We expect continued supply-side interventions, with inflation likely to be above 6 per cent levels in July and August, buoyed by sky-high vegetable prices,” Nomura economists said.

Last year, inflation had been above the 6 per cent mark — the upper tolerance level under the flexible inflation targeting set up — for over three quarters at a go. This led to RBI writing an explanatory note to the government explaining the reasons for the price rise being above the set threshold.

The Reserve Bank of India (RBI) started its efforts to tame inflation with rate hikes and upped the repo rate by a cumulative 2.50 per cent in policy actions from May 2022 to arrest the price rise.

Earlier this year, the central bank paused its rate hike cycle to pay attention to growth, and many analysts expect a prolonged pause in policy rates before it starts cutting interest rates.

The Consumer Price Inflation (CPI) rose to 4.81 per cent in June from 4.31 per cent in May, driven by a spike in food prices. Nomura said the rice inflation rose to 12 per cent in June from 9 per cent earlier, and daily data is suggesting a further rise in the prices in July as well. The government had imposed a 20 per cent export tax on non-basmati rice in September last year, and with the latest move, 42 per cent of the rice exports are now banned, Nomura said.

According to the note, the late arrival of monsoons and its uneven spread is disrupting paddy sowing which, as of mid-July, is 6 per cent lower right now.

“It (the export ban) also marks the latest in a series of supply-side interventions, highlighting inflation as a political priority, with state elections in Q4 2023 and general elections in Q2 2024,” the brokerage said.

Further, it said that India accounts for 40 per cent of the global rice exports and that the ban will have an impact on global prices.

Thailand can gain through the Indian move because the South East Asian country is a net rice exporter. Among the rice importing nations, Philippines, Singapore, Hong Kong and Malaysia might be impacted by the move, it added.

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