New Delhi, Aug 14 (Mayank Nigam) CPI inflation moderated to five-month low to 6.71 per cent in Jul’22 due to easing of food inflation, according to Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India. Fuel CPI, however, increased by 162 bps m-o-m. Core CPI also moderated to 10-months low to 5.79 per cent in July. Our slicing of CPI inflation into Supply/Demand CPI and Neutral indicates that supply side factors which were responsible for 65 per cent of CPI inflation in May now stands at 58 per cent mainly owing to easing of global supply disruptions. Demand factors’ contribution has reached 40, he said. Ghosh said though, the overall CPI inflation eased from April to June, among the states, but there are many bigger states, whose inflation continue to be above 7 per cent in July 2022. Among the 23 States, there are 15 States whose inflation is above 6 per cent (21 States in April) and 8 States with inflation rate of below 6 per cent.
He said going forward, we now expect inflation trajectory for India to be benign. CPI numbers for March 23 could be even lower than 5 per cent. While the crude has exhibited signs of softening thereby cooling off inflationary concerns further locally, we are in a paradoxical situation where inflation trajectory may not have a cascading effect on runaway exchange rate dynamics as sentiments in South China sea could steer the patchy global sentiments. Also, inflation numbers in US are likely to head lower, though core might remain elevated. Ghosh said Moderation in the US inflation has increased expectations of slower paces of normalization by US Fed. Going by the past precedence Fed can still aggressively rise rates. In the short run the dollar will appreciate due to falling US inflation and Fed’s hawkish stance. There will be flight to safety and the FII flows will be driven by sentiments. The appreciation of the US dollar can feed into imported inflation pressures in India leading to slower correction in CPI reading, and that remains as an upside risk. Under the evolving situation the repo rate will tend to be at 6 per cent +/- 25 bps by end of FY23, he added.