After rising to 6.95% in March, India’s retail inflation is likely to surpass 7% and remain above that level through September, SBI economists wrote in a report on Wednesday, raising their inflation forecast for 2022-23 to 6% from 5.8%. 5% on the possibility of a “extended” food price shock.
Even after September, consumer inflation is likely to ease only slightly to between 6.5% and 7%, said SBI Group chief economic adviser Soumya Kanti Ghosh, adding that inflation is likely to top 7% in the first half of the year and half going up about 6.5%. Other economists also expect inflation to test the Reserve Bank of India’s forecast average rate of 6.3% in the first quarter and 5.7% for the year.
The full impact of the fuel price hikes implemented in the second half of March has yet to be reflected in the inflation data, and 80% of the increase in price trends in March was attributed to the grocery segment, DBS Group Research highlighted in a note. “Bad weather and global commodity gains have pushed up prices for perishable goods (vegetables), apart from cooking oils,” they wrote in a report.
“We see a slight upside risk to the official forecast of 6.3% for the first quarter, dependent on international crude oil movements. If our forecast holds, there is a risk of inflation breaching the upper end of the 2-6% target for three consecutive quarters, testing the legal mandate of policymakers,” wrote Radhika Rao, senior economist at DBS Group, in a note co-authored with Senior Rate Strategist Eugene Leow and Senior FX Strategist Philip Wee.
Mr Ghosh pointed to additional upside risk to inflation from rising farm input costs, which would require a larger increase in the Minimum Support Price (MSP) for crops.
“Diesel prices have risen by £10 in the last two weeks, fertilizer prices have soared, while labor costs have risen by an average of 4% compared with 6% in the previous financial year. Production costs are likely to increase by around 8-10%,” he pointed out, which could result in a 12%-15% increase in the recommended MSP, compared to the previous range of 3%-5%.
This will escalate the impact on food price inflation, and headline inflation, already affected by the Russia-Ukraine conflict, has significantly affected the inflation curve.
“Wheat, protein products (especially chicken), milk, refined oil, potatoes, chili peppers, kerosene, firewood, gold and LPG are major contributors to headline inflation. The conflict has abruptly inflated chicken prices as chicken feed imports from Ukraine are disrupted,” the SBI report noted, stressing that supplies of sunflower, palm and soybean oils are also under pressure.
