Economists at HSBC Securities and Capital Markets (India) said the Indian economy could see another bout of inflation as rural demand revives and the informal sector recovers from pandemic lows.
Consumer price inflation remained above the central bank’s upper tolerance band of 6% for most of 2022, before falling below it in the final two months of the year to rise again to 6.5% in January.
Retail inflation rises above the upper tolerance limit Retail
In contrast to the global experience, goods inflation in India is outstripping services while core prices remain elevated, Pranjul Bhandari and Aayushi Chaudhury said, economists said in a note on Thursday evening.
We believe it has a lot to do with the revival of demand in the rural and informal sectors. While rural demand was weak at the start of last year, inflation-adjusted wage growth has now surpassed pre-pandemic levels, HSBC research showed. Incomes will be further aided by strong sowing in the winter period. The informal sector, closely linked to the rural economy, is experiencing a gradual recovery.
Economists pointed to the implications of rising rural incomes for inflation, saying “there is already food inflationary pressure, especially for cereals and milk As we await the winter harvest due in March/April, food prices are likely to remain elevated,” they added.
Producers will use strong demand conditions to restore margins, raising the risk that inflation will remain higher, economists said.
“While the winter harvest is good, the rural demand it generates will stand in the way of disinflation as producers continue to recover margins, pushing down core inflation,” they said. “And if the winter harvest is weak due to last-minute weather disturbances, food inflation could remain high even as rural incomes and core inflation decline.”
With inflation averaging 5.4% in 2023/24, HSBC expects the central bank to raise the key interest rate by a further 25 basis points from the current 6.5%. But they expect the bank to cut rates before the end of the next financial year as growth in a weak global economy slows to 5.5% from 7% this year.
