Kolkata, June 14 (FN Representative) The CPI data released on Monday came dot along our projections, belying many expectations built on the far upper side, according to Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India. After rising to a 95-month (almost 8 years) high to 7.79% in Apr’22, CPI inflation moderated to 7.04% in May’22 due to broad-based deceleration. He said Core CPI also moderated in May to 6.09% as compared to 6.97% in Apr’22. Ghosh said the deceleration in Rural CPI is the major reason for this slowing of inflation in May. Rural CPI decelerated to 7.01% in May from 8.38% in Apr’22 mainly on account of health, education and personal care and effects whose combined weighted contribution declined by 35 bps and food and beverages whose weighted contribution declined by 40 bps. He said urban inflation on the other hand remained sticky at 7.08%. One divergent trend is visible in case of food and beverages, whose weighted contribution has declined in rural areas but increased in urban areas. Ghosh said in recent times there have been commentaries that have questioned whether RBI has been behind the curve in controlling inflation. We believe RBI is much ahead of the curve in controlling inflation and the Fed can borrow a template from RBI to control US inflation that is all pervasive and threatens to rip apart global financial stability.
In fact, pass through of energy inflation has been sharply higher in US also and in fact is higher than India. The interesting part is that energy and transport have higher share in weighted contribution in overall inflation in the US when compared to India. In India, share of energy in weighted contribution of CPI inflation is 9.2% while in the US it is 29.2%, he said. For transport it is 36.6% in the US compared to 10.3% in India. We must appreciate the invisible Government hand of controlling inflation in India of limiting the pass through by employing an activist fiscal policy, Ghosh said. Meanwhile, the global economy continues to grapple with multi-decadal high inflation and slowing growth, persisting geopolitical tensions and sanctions, elevated prices of crude oil and other commodities and lingering COVID-19 related supply chain bottlenecks, he said. Ghosh said as per World Bank’s latest assessment, global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022. Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation. Growth in advanced economies is projected to sharply decelerate from 5.1 percent in 2021 to 2.6 percent in 2022 – 1.2 percentage point below projections in January. Among emerging market and developing economies, growth is also projected to fall from 6.6 percent in 2021 to 3.4 percent in 2022. The slowdown in the US and EU will adversely impact the Indian exports as export demand may slow down, he said. An uptick in economic activity in Apr/May’22 is evident in high frequency leading indicators.
The percentage of indicators showing acceleration (% yoy growth) have risen to 88% and 95% in Apr and May, respectively in comparison to 55-65% range in Jan to Mar, Ghosh said. Apart from other sectors, responding to the removal of restrictions, services sector retained momentum which was echoed in high frequency leading indicators recording growth in most trade and transport sectors. Contact-intensive aviation and tourism sectors recorded sequential improvement, but the recovery remains lagged and will take time to recoup, he said. Ghosh said the provisional data of ASCB for the fortnight ended 20 May’2022 indicates that, aggregate deposits grew by 9.3% YoY, compared to last year growth of 9.7% and Bank credit grew at 12.1% YoY compared last year growth of 6.0%. He said the incremental growth in credit is Rs 1.35 lakh crore, compared to last year negative growth of Rs 1.18 lakh crore.
Robust credit growth reported across sectors including, Industry, Services and Personal segment, which grew by 14.7% YoY, as per the sectoral deployment as of April’2022. “We are expecting that RBI could factor in rate hike in Aug’22 (as inflation in Jun’22 is likely to come above 7%) and even in October policy, and take it higher than pre-pandemic level by October to 5.5%. Our peak rate at the end of the cycle now has now a higher probability of a lower bound of 5.5% and a lower probability of going up to 5.75% depending on inflation trajectory. This is purely data dependent and subject to revisions. Our average inflation forecast for FY23 is 6.7% but our quarterly inflation numbers are slightly different from RBI,” Ghosh said. The best thing is that the peak of inflation may have been reached at 7.8%, with a little bit of luck. 10 year yield is also likely to be capped at 7.5%, assuming 5.5% as peak repo rate, he added.