Inflation will fall below 4% only after December: SBI report

Inflation rate during August, the data for which is yet to be released, was likely to remain at about 7 per cent, said SBI Ecowrap.

Attributing the recent surge in retail inflation to huge government procurement and supply disruptions on account of the COVID-19 pandemic, an SBI report said that the price rise was likely to come down to below 4 per cent only after December.

The Consumer Price Index (CPI) inflation rate during August, the data for which is yet to be released, was likely to remain at about 7 per cent, said SBI Ecowrap.

The data is scheduled to be released on Monday.

According to government data, the retail inflation rose to 6.93 per cent in July, mainly driven by rising prices of food items like vegetables, pulses, meat and fish. It was 3.15 per cent in the corresponding month last year.

"We expect August inflation numbers to be elevated at around 7 per cent or even higher and if the base effect is the primary reason, inflation could only come down to below 4 per cent possibly beyond December," the SBI report said.

However, the report further said that it looks difficult to believe that supply disruptions would normalise against the huge upsurge in pandemic in rural areas and this now poses an upside risk to inflation numbers.

"We are thus less hopeful of any rate cut in current fiscal/at best 25 bps as February MPC meeting would consider December inflation only," it said.

The Reserve Bank of India, which mainly factors in retail inflation while arriving at its monetary policy, had kept the short-term lending rate unchanged to help tame inflation last month.

The report postulate that the jump in food prices is largely because of huge procurement by government and supply disruption that pushed up prices of cereal, potato, tomato and protein items.

It further said as inflation targeting comes up for review in 2021, "we believe, one way to make inflation targeting successful in the Indian context as time goes by is to reach the 4 per cent target over a particular business cycle rather than for a particular date..."

This would encourage predictable inflation targeting in the face of persistent negative shocks, and recently the US Federal Reserve also espoused such a conviction, it said.

The RBI has been tasked by the government to keep inflation at 4 per cent (+,- 2 per cent).

Photograph: Rupak De Chowdhuri/Reuters