Inflation in India ‘hot’, faces high and rising underlying inflation: Report

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The Indian economy is currently facing high underlying inflation and needs further policy tightening, according to a note by research firm Nomura.

As per the report, only four nations in Asia feature in the basket of ‘hot’ economies wherein the inflation rate is on the higher end of the spectrum. These economies include India, Singapore, South Korea, and Taiwan.

The nations featuring in the ‘hot’ bucket need further policy tightening, the note says. “For the four economies in our ‘HOT’ inflation bucket, real policy rates remain significantly negative, which calls for more policy tightening, with the risk that policy will need to be front-loaded and need to move beyond neutral”, the report said.

Countries featuring in the ‘warm’ bucket, i.e, those economies where underlying inflation is around the target but on an uptrend, include Indonesia, Malaysia, the Philippines, and Thailand. Hong Kong is the only country to feature in the ‘cold’ bucket as it faces low, stable underlying inflation that accounts for only a part of the overall inflation

The headline retail inflation has been on an uptrend in India for a few months now and to limit this quick spike, the RBI earlier last week had announced a rate hike of 40 bps, with analysts expecting more hikes in the coming months. India’s underlying inflation measure at 6.1% has already breached the upper bound of the RBI’s 2-6% target range, the report said.

India’s share of underlying inflation in headline inflation, at 88%, is one of the highest in Asia, Nomura says. The firm now expects more aggressive and frontloaded hikes, i.e, 135 bps in additional rate hikes in 2022, and a terminal rate of 6.25% by Q2 2023, the report said.

As per a Reuters poll, India’s retail inflation likely surged to an 18-month high in April, largely driven by rising fuel and food prices. The headline CPI reading is likely to have surged to 7.5% in April, according to a May 5-9 Reuters poll of 45 economists, from 6.95% in March.

Nirmal Bang NSE -4.97 % in a note to investors said that the CPI inflation is likely to rise to 7.4%, led by higher prices of edible oil and fuel and a gradual pass-through of rise in input costs to retail prices as well as inflation in the services sector, supported by the opening up of the economy, the report said.

The retail inflation reading for the month of April is due on May 12. (Source: Economic Times)