The fears of adverse impact of El Nino has reduced in India, improving the prospects of Kharif output in the coming months. But the risks from oilseeds and pulses inflation may add to consumer inflation. The Reserve Bank may still prefer to pause till the next fiscal unless the Q3 and Q4 numbers are far beyond estimates, according to economists. Besides, prolonged pause by major central bank is expected.
” Even as El Nino impact is somewhat weaker in India ( going by the monsoon trend) it is still going to have an impact on Malaysia and Indonesia,” said Madan Sabnavis, chief economist at Bank of Baroda, underscoring the need to be watchful as we rely on palm oil products from these countries.
“Even though Kharif sowing is going to be good we need to be watchful of oilseeds and pulses inflation,” Sabnavis said at a webinar on the state of the Indian economy.
But the central bank might not act in a hurry to take any rate action as policymakers would prefer to wait and watch the third and fourth quarter numbers. The inflation excluding vegetables and fruits has remained in the 5%-5.5% range since April 2023 and this factor may prompt RBI to not raise policy rates according to India Ratings. ” Besides, a prolonged pause by the major central bank is also on the cards,” Sabnavis said.
CPI inflation surged beyond the central bank’s comfort band of 2-6 percent in July 7.4 percent due to a surge in vegetable prices. The RBI is expected to look through the surge in inflation with headline expected to moderate to below 6 percent in the second half of FY ‘2023-24. However, the significantly higher July numbers raises the generalization of price pressures, if the food inflation surge persists. “Assuming food prices moderate in the coming months and core inflation stays well behaved, RBI is expected to remain on pause in FY’24” said Gaura Sengupta of IDFC First Bank.
September CPI inflation is likely to come back within the RBI’s tolerance band of 2-6%, and there is room for CPI to even be back below 5% by end of 2023, according to Barclay’s Economic Research.
