UBS sees inflation overshooting RBI target by 60 bps this quarter to 6.8%

Analysts are divided on their retail price inflation forecast, with some saying the first quarter numbers will overshoot the RBI target by as much as 60 bps while others are softer in their estimate.

Consumer price inflation retreated from its 15-month peak of 7.4 per cent in July to 6.8 per cent in August, much lower than the market expectations, despite vegetable prices remaining elevated at 26.1 per cent.

Food inflation eased to 9.9 per cent from 11.5 per cent, led by some cooling of inflation in vegetables, cereals, pulses and milk.

Even core inflation softened in the month.

The positive surprise against the 7-7.1 per cent consensus was driven by food inflation decelerating massively on the back of lower vegetable prices.

After touching a 39-month high of 11.5 per cent in July, food inflation slipped to 9.9 per cent in August.

"At 6.8 per cent for August, the inflation print was below our consensus expectation of 7.1 per cent.

"The core inflation eased further to 4.8 per cent from 4.9 per cent in July and 6.1 per cent average registered in FY23.

"However, we expect headline CPI inflation to remain above 6 per cent in September and overshoot the RBI forecast of 6.2 per cent for the second quarter by as much as 60 bps," Tanvee Gupta-Jain, the chief economist at UBS Securities India, said in a note on Wednesday.

The final print still remains high due to price pressure in rural areas, which rose year-on-year by 7 per cent from 6.6 per cent in urban areas, she said.

Therefore, she expects CPI to remain above 6 per cent for September and overshoot the RBI's forecast of 6.2 per cent by 60 bps to 6.8 per cent or so.

Gupta Jain also maintained her baseline estimate of full-year CPI inflation averaging at 5.6 per cent in FY24.

On the policy front, she sees the rate-setting Monetary Policy Committee (MPC) remaining vigilant on inflation and leaving the repo rate on a prolonged pause at 6.5 per cent through the remainder of FY24.

However, given that headline inflation has been sustaining above the central bank's upper tolerance band of 6 per cent, she expects the MPC to manage interbank liquidity to ensure overnight rate stays around or slightly above the repo rate.

She said UBS analysis of the monthly price momentum across all vegetables over the past decade suggests that vegetable prices mostly peak in July, decelerate in August and contract in September; tomato prices show a clear seasonal pattern between June and July as the crop gets affected due to monsoons and begin to fall from August onwards.

Notably, tomato prices corrected by 20 per cent in August following a sharp increase of more than 200 per cent in July.

In a report, Crisil Ratings said food prices are still driving inflation as the non-food components stayed unchanged in the month at 4.8 per cent, CPI excluding food and fuel at 4.9 per cent, services CPI at 4.5 per cent and core CPI goods, excluding food and services at 5.1 per cent.

The report underlined that while falling food inflation is a relief, it is not yet in a comfort zone because, at 9.9 per cent, food inflation is driven by vegetables inflation at 26.1 per cent, cereals inflation at 11.9 per cent and pulses inflation at 13 per cent, though all these heads displayed moderation in inflation compared with the previous month.

"We expect a correction in vegetable inflation in the coming months, but some rigidity in cereals and pulses inflation," it said, adding they also expect the Reserve Bank to look through the July-August lift in inflation due to sharp spike in vegetable prices and maintain status quo on rates and stance in October.

The agency has retained its recently revised up inflation forecast of 5.5 per cent for the fiscal from 5 per cent earlier.

In a report, HSBC India analysts said the August print was a tad lower than its forecast of 7 per cent.

But, they warned that there is an all-round inflation in other food items, especially in cereals, pulses, fruits, oil & fat, and spices.

Cereals make up 9.7 per cent of the inflation basket and cereal price shocks are far more persistent than other food items, staying in the system for six months or more, and even spilling over into core prices, they added.

The report warned that if cereal inflation persists beyond November, headline inflation may come in about 30-50 bps higher than the RBI's current inflation forecast of 6.2 per cent, forcing it to consider a rate increase.