There is a "core" issue with RBI's efforts to attain lower inflation: Nomura

13 Jul 2022 , 03:14 PM

Although the most recent retail inflation reading for the month of June may have remained unchanged at 7%, a closer examination of the data reveals a sticky core that makes the RBI’s battle against increasing prices challenging.

With the exception of June, when the government intervened on the budgetary front by decreasing gasoline taxes, the trend of total inflation remains unpredictable. Fears that aggressive central bank actions may push the advanced countries into a recession are a major source of global anxiety.

The RBI is no exception, having increased its benchmark interest rates by 90 basis points so far this fiscal year while India’s economy was struggling to recover from a pandemic-induced downturn. The RBI has revised its estimate for India’s FY23 GDP growth to 7.2%.

In June, the core inflation rate–which doesn’t include food and fuel–rose by 6%. During the epidemic, the hotel industry was among the worst-hit sectors. As demand soars despite supply shortages, the reopening of the services sector poses a possibility of exacerbating the inflation issue even further.

In recent research, Nomura stated that “a thorough dive into the core inflation basket reveals that companies continued to pass on increased input prices to consumers, and the services sector opening again also added to pricing pressures.”

As commodities cool off, a recession in advanced nations may have a positive influence on inflation, but it will be difficult to predict how it would affect retail prices in the long run.

Nomura has revised its inflation forecast for FY23 to 7%, which is somewhat higher than the RBI’s estimated 6.7%. Vegetable price seasonality has been identified as a short-term concern.