India's Retail Inflation Unlikely To Hit RBI's 4% Target In 2023, Say Economists

India's retail inflation may have cooled, bringing some relief to the central bank, but it is unlikely to hit the Reserve Bank of India's mid-point target of 4% in 2023, according to economists. 

However, lower but range-bound inflation along with resilient growth are expected to culminate in a status quo for the Monetary Policy Committee for the remainder of 2023, they said.

The country's consumer price index-based inflation cooled to its lowest in 25 months in May, falling to 4.25% from 4.7% in April, but remained within the central bank's mandated tolerance band of 4% plus or minus 2% for the third straight month.

"Headline inflation is still above the target as per the latest data and is expected to remain so according to our projections for 2023–24," RBI Governor Shaktikanta Das said last week. The disinflation process is likely to be slow and protracted, with convergence to the inflation target of 4% being achieved over the medium term, he said in an address in London on Tuesday.

The headline CPI print of 4.25% for May offers a brief reprieve and aligns well with the RBI’s recent commentary of desiring inflation to move towards the 4.0% target over time, according to QuantEco Research. However, the May print will prove to be a point of "local minimum" in this inflation cycle, with subsequent inflation readings moving somewhat higher and remaining in the 4.5–5.5% range over FY24, it stated.

IDFC First Bank forecasts headline inflation in June to track a tad higher at 4.3% after building in daily food prices until the first half of the month, which showed a pick-up in prices of vegetables, fruits, and pulses. The monsoon remains the key risk to inflation, with a high chance of El Nino conditions developing, according to Gaura Sengupta, economist at IDFC First Bank. Given the delayed arrival of the monsoon, performance in June is likely to remain below normal, it said, adding that, from a crop output perspective, July is important as the majority of the sowing is completed by then.

There could be a marginal uptick in inflation in the next few months as support from favourable base conditions wanes, according to CareEdge Ratings. Inflation is broadly expected to remain range-bound, averaging 4.7% and 5.0% in the first and second quarters of fiscal 2024, respectively, it said, adding that the second half could see a marginal uptick in retail inflation.

The supply-side measures taken by the government to contain the prices of essential food items such as wheat and pulses augur well for food inflation. However, uncertainties on the weather front and volatile crude oil prices pose an upside risk to projections, CareEdge said.

Assuming a normal monsoon, CPI inflation is projected at 5.1% for FY24, with Q1 at 4.6%, Q2 at 5.2%, Q3 at 5.4%, and Q4 at 5.2%, according to the RBI's projection in its June policy.

On the policy front, an expectation of lower inflation has prompted the RBI to pause for the second consecutive time. However, in a commitment to move towards its 4% target, the central bank has kept its tone hawkish by leaving the stance unchanged, CareEdge said. The ratings agency expects a status quo on the policy rate, with growth expected to hold up well.

The RBI will continue with its pause stance for an extended period, possibly till December 2023, to watch for risks from El Nino and the monsoon performance in the current year while also assessing the impact of the 250 basis point rate hike on the economy, said. Suman Chowdhury, chief economist at Acuité Ratings & Research.