The Economic Times daily newspaper is available online now.

    Economists expect inflation to come down by 20-40 bps

    Synopsis

    Retail inflation hardened to an eight-year high of 7.79% in April. In a surprise move, the Reserve Bank of India raised the policy repo rate by 0.4 percentage point (40 basis points) to 4.4% earlier this month. The central bank's monetary policy committee (MPC) had also suggested a cut in fuel taxes to dampen inflationary pressures.

    Kotak Mahindra bank backed Phoenix ARC set to acquire Bank of India's VVF (India) loanAgencies
    Representative Image
    Economists expect a 20-40 basis point reduction in consumer inflation because of the cut in excise duties on petrol and diesel on Saturday that brought down retail prices of these fuels sharply. The reduction in customs duty on inputs for steel and plastics and measures to improve cement availability are also expected to help.

    The retail price of petrol dropped ₹9.5 a litre while diesel was priced ₹7 a litre less after the Centre cut excise duty by ₹ 8 and ₹ 6 a litre, respectively.

    Retail inflation hardened to an eight-year high of 7.79% in April. In a surprise move, the Reserve Bank of India raised the policy repo rate by 0.4 percentage point (40 basis points) to 4.4% earlier this month. The central bank's monetary policy committee (MPC) had also suggested a cut in fuel taxes to dampen inflationary pressures.

    "Inflation can come down by around 0.4%. Prices are still high and instead of inflation of close to 30% for petrol, it will be around 20%," said Bank of Baroda chief economist Madan Sabnavis.

    666


    'Full Impact from September Quarter'
    Inflation will slow because of lower fuel prices and the indirect impact of the reduction in transport, travel and logistics costs. The full impact of the reduction will be seen in the June inflation numbers given that only 10 days are left in this month and the measures will take time to percolate through the economy. As a direct impact, the excise duty cut is likely to reduce inflation by 20 bps, said Sakshi Gupta, principal economist at HDFC Bank.

    Finance ministry officials said that duty cuts were required to control inflation as the recent hike in interest rates will only partially solve the problem. "Many factors are global and due to supply-side disruption, (and) especially because of the lockdown in China, such measures were required," said an official, adding that its full impact will be visible from the September quarter.

    Kotak Mahindra Bank expects an overall impact of 30-35 bps on inflation. "The first-round impact of the excise cut will be felt for only about 10 days this month. We are waiting to see how many states follow suit with VAT cuts, which will also determine the second-round impact," said ICRA chief economist Aditi Nayar.

    Assuming global crude remain at current levels and the tax cuts are passed on fully by oil marketing companies to consumers, Nomura said the near-term impact on inflation is likely to be around 0.2 percentage point (pp) due to direct effects. "An additional impact of 0.1-0.2pp from second-round effects... that's a full impact of 0.3-0.4pp," Nomura said.

    Nayar said ICRA is tentatively projecting May retail inflation at 6.5-7%, dampened by the base effect as well as the initial impact of the excise cuts.


    (You can now subscribe to our Economic Times WhatsApp channel)
    (Catch all the Business News, Breaking News, Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more

    (You can now subscribe to our Economic Times WhatsApp channel)
    (Catch all the Business News, Breaking News, Budget 2024 News, Budget 2024 Live Coverage, Events and Latest News Updates on The Economic Times.)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the ET ePaper online.

    ...more
    The Economic Times

    Stories you might be interested in