Retail inflation likely to touch 4.4% in the second half, Nomura report

The Dollar Business Bureau

According to the Japanese financial services major Nomura’s report, India’s retail inflation is likely to touch 4.4% in the second half of 2017. This will in all likelihood be driven by the food prices and the base effect, the report specified.

Although inflation has bottomed during the medium term, the report says that it is likely to see a significant uptrend and rise above RBI’s estimated target.

In its research note Nomura says, “In India, we expect CPI (Consumer Price Index) inflation to rise well above the Reserve Bank of India's mid-point target (4%), with core inflation rising to 6.3% in 2018, led by rural wages, minimum support prices, a closing output gap and the supply demand cobweb model of food prices starting to kick-in.”

The report also states that apart from the sharp moderation in CPI food inflation which India experienced in 2016, is likely to cause adverse base effects to increase through the remaining year of 2017. "We estimate that adverse base effects alone will add 1.5 pp and 0.4 pp to headline and core CPI inflation respectively, in second half 2017," the report stated.

Though CPI troughed in June it is likely to increase in a gradual manner by the end of 2017. This could be as a result of deflation in food prices, base effects turning adverse  and an increase in house rent allowances by the Central government employees allowing an inflation in housing in the month of July.

Retail inflation hit the bottom in June with 1.54% with prices of food items like vegetables, milk products and pulses hitting rock bottom. In 2018, the report predicts that cyclical factors like rising rural wage growth, higher minimum support prices and a narrow gap in output is expected to push the inflation higher. "We expect headline and core CPI inflation to rise to 4.4% and 5.2%, respectively, by end-2017 and average 5.3% and 6.3% in 2018,” the report cautioned.