RBI may marginally increase inflation forecast in August policy: Money market experts

In its June monetary policy, the central bank projected CPI inflation at 5.1 percent for 2023-24.

So far in August, the central bank has not conducted any VRRR auctions despite the huge liquidity surplus in the banking system.

The Reserve Bank of India (RBI) is likely to increase the average inflation forecast marginally in the August bi-monthly monetary policy due to concerns over vegetable prices and excess rainfall in some parts of the country, money market experts said.

They expect the central bank to increase the average inflation to 5.40-5.50 percent from 5.1 percent in FY24.

“There is imminent inflationary pressure on account of the recent surge in vegetable and pulse prices, which could linger on for the next two to three months. Hence, the RBI’s forecast for CPI may increase,” said Nagesh Chauhan, Head, Debt Capital Markets, Tipsons Group.

Further, according to Puneet Pal, Head of Fixed Income, PGIM India Mutual Fund, they expect the RBI to retain its guidance on growth while marginally increasing its forecast for average Inflation for FY24 from 5.40 percent to 5.50 percent.

In its June monetary policy, the central bank projected CPI inflation at 5.1 percent for 2023-24, with Q1 at 4.6 percent, Q2 at 5.2 percent, Q3 at 5.4 percent, and Q4 at 5.2 percent.

However, some bond dealers said there is a lower expectation of an increase in the inflation forecast, but the central bank could give a hawkish commentary.

In the past few weeks, vegetable prices have shot up sharply, and excess rainfall in some parts of the country has put some pressure on inflation. Economists said the pick-up in food prices is led by vegetables, but price pressures are also seen in other food items, such as cereals, pulses, and proteins.

Why inflation surged?

In June, CPI inflation surged to 4.81 percent from 4.32 percent in May due to a rise in vegetable prices and the fading away of the favourable base effect.

Higher food prices drove up inflation in June, with the Consumer Food Price Index of the CPI rising 2.5 percent month-on-month (MoM).

Leading the charge were vegetable prices, whose index jumped 12.2 percent from May, even though the year-on-year (YoY) inflation rate of -0.93 percent showed vegetable prices were lower compared to June 2022.

According to Emkay Global’s report, June has been the major contributor to reversing the moderating inflation trend. While retail tomato prices have not completely peaked yet, non-perishables such as pulses and spices are showing persistence. However, this may not change the RBI’s perspective on inflation.

Further, the report said the central bank’s own research depicts that seasonal increases in episodes of high tomato prices tend to be short-lived – the average duration of a high price episode is around 2.6 fortnights, and prices do not ratchet up across these seasonal spells. Going forward, cereal inflation will be manageable, given adequate buffer stocks and the government’s recent ban on rice exports.

Other expectations

Money market dealers are expecting some updates on the variable rate reverse repo (VRRR) auction in the August monetary policy, which may help keep the overnight rate at the policy rate level.

“RBI is yet to conduct any fresh VRRR auction this month, and the market is expecting some updates on the above in the MPC policy,” said Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincorp.

So far in August, the central bank has not conducted any VRRR auctions despite the huge liquidity surplus in the banking system. Hence, dealers are expecting some announcements on VRRR in the policy.

Currently, liquidity in the banking system is in surplus of around Rs 1.92 lakh crore.

In the last few months, the central bank has been proactively managing liquidity by conducting various VRRR auctions, which led overnight rates to align with the repo rate.

The RBI has conducted 16 VRRR auctions since June, but the response it has received from banks has been muted.

According to RBI data, the central bank has conducted auctions for a total value of Rs 18 lakh crore since June. However, banks parked only Rs 7,73,023 crore in these auctions.

Dealers said the yield on the benchmark bond would remain range-bound in an upward direction as it would take cues from the US treasury yields and inflation forecast.

Currently, the yield on the 10-year 7.26 percent 2033 benchmark bond is at 7.1701 percent.

With Thanks Reference to: https://www.moneycontrol.com/news/business/rbi-may-marginally-increase-inflation-forecast-in-august-policy-money-market-experts-11135461.html