India’s high inflation to stick for longer, rates to rise more

One of the later entrants in the current round of global monetary policy tightening, the Reserve Bank of India raised its repo rate by a total of 90 basis points in May and June, but the inflation outlook has deteriorated since an April poll.

Soaring global commodity prices have kept inflation above the RBIs 6% upper tolerance range all year while.

So far, New Delhis fiscal response to rising costs of living in the country of 1.4 billion has been modest.

Inflation was set to measure 7.3% and 6.4% in Q3 and Q4 2022, respectively, according to forecasts from the July 4-11 Reuters poll. In the previous poll, inflation was set to return to the RBIs tolerance band by end-year.

“In India, inflation will prove a lot more stubborn than it will in other parts of the region. Things will get better, but they will get better much faster in other parts of Asia,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

Average inflation this fiscal year was pencilled in at 6.8% according to a survey of 42 economists, a sharp upgrade from 5.5% in the April poll, coming down to 5.2% and 4.7% in the following two years, respectively.

The RBI is expected to further hike the repo rate, currently at 4.90%, by another three-quarters of a percentage point to 5.65% by end-year. That is slightly higher than a separate survey taken in June, which put rates at 5.50% by then.

In the latest poll, over half of the economists, 25 of 48, forecast rates to be at 5.50% or higher by the end of this quarter.

Among those who provided a forecast for the August meeting, more than one-quarter, 10 of 35, expected the RBI to hike by 35 basis points to 5.25% at its meeting next month, while 14 expect a smaller quarter-point hike. Nine said the RBI would raise by 50 basis points, one said 40 and one said 30.

While India remains one of the fastest-growing major economies, growth is forecast to average 7.2% this fiscal year, slightly lower than the 7.5% pace estimated in a previous Reuters poll, and in line with the RBIs 7.2% projection.

“India would still remain one of the fastest growing economies… but Indias growth will be still pretty weak by the standards of what India requires,” said Kunal Kundu, economist at Societe Generale.

“The less-appreciated challenge for the Indian economy is the fact domestic demand is weak…simply because jobs are not being generated to the extent they should have.”

Asked how the employment situation has changed over the past month, 15 of 27 said it had improved slightly, with the remaining 12, over 40%, saying it had worsened slightly.

Still, the cost of living crisis is not expected to ease significantly until at least next year. Of economists who answered an extra question, 20 of 26 said it would take at least six months or more. The remaining six said within six months.

A weakening rupee has exacerbated the issue further. The currency, already down over 6% for the year due to higher oil prices – Indias biggest import – was expected to set a new record low of 80 to the dollar by September, a separate Reuters poll found.