India’s easing inflation does not suggest that price pressures have waned so far, according to Societe Generale.
The country’s retail inflation – the central bank’s key price gauge – slipped to 6.71 percent in July after staying near or above 7 percent for four consecutive months.
“This, however, suggests that the belief in persistence of price pressure is not unfounded and the potential easing trajectory due to high statistical base effect would be a shallow one, quite in line with our expectation,” Kunal Kumar Kundu, India economist at Societe Generale, said in a note.
Retail inflation for the current fiscal year appears to be in line with the house’s expectation of 6.5 percent, he added.
Moreover, even though the wholesale price inflation too eased in July, it has averaged at 14.7% during the first seven months of a calendar year, the highest on record.
“While this suggests lower rate of transmission of input cost pressure to output prices, it also implies high probability of stickiness of elevated retail prices going forward even if input costs drop off as corporates, suffering from a prolonged period of stressed margins, would likely use the opportunity to get their profitability back on track as domestic demand conditions recover,” Kundu said.
Meanwhile, there are signs that food prices may remain sticky as price hikes in some products are still visible and as rising prices of cereals, paddy and wheat may keep inflation boiling.
The 5 percent goods and services tax imposed on ‘pre-packaged and labelled’ food items, like wheat, rice, curd, lassi, puffed rice, mutton and fish, will further add to inflationary pressure, the house said.
India’s central bank is only two months away from failing to meet its inflation mandate, which is deemed to occur when average inflation is outside the 2-6 percent tolerance range for three consecutive quarters.
Retail inflation has averaged 6.3 percent in January-March and 7.3 percent in April-June. Inflation is expected to average 7.1 percent in July-September, according to the Reserve Bank of India’s forecast.
The RBI’s rate-setting panel has hiked the key policy interest rate by a total 140 basis points since early May to curb price pressures.