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Inflation to Remain Above RBI’s Tolerance Band for Rest of 2022: Reuters Poll

Soaring global commodity prices have kept inflation above the RBI's 6% upper tolerance range all year. Inflation was set to measure 7.3% and 6.4% in Q3 and Q4 2022, respectively, according to forecasts.
inflation

Representational use only.Image Courtesy: Deccan Herald

India's inflation will hold above the top of the Reserve Bank of India’s tolerance band for at least the rest of 2022, longer than previously thought, making several more interest rate hikes in coming months all but inevitable, a Reuters poll showed.

The RBI raised its repo rate by a total of 90 basis points in May and June, but the inflation outlook has deteriorated since the last round of the poll conducted in April.

Soaring global commodity prices have kept inflation above the RBI's 6% upper tolerance range all year. Inflation was set to measure 7.3% and 6.4% in Q3 and Q4 2022, respectively, according to forecasts from the July 4-11 Reuters poll. In the previous poll, inflation was set to return to the RBI's tolerance band by end-year.

The developing situation clearly suggests that the cost of living will likely keep rising beyond reach for a large population of the country, where the top 10% earn Rs 25,000 on average per month, according to the latest State of Inequality in India Report by the Economic Advisory Council released in May.

The RBI is expected to further hike the repo rate, currently at 4.90%, by another three-quarter of a percentage point to 5.65% by end-year. That is slightly higher than a separate survey taken in June, which put rates at 5.50 per cent by then.

In the latest poll, over half of the economists, 25 of 48, forecast rates to be at 5.50% or higher by the end of this quarter.

Among those who provided a forecast for the August meeting, more than one-fourth, 10 of 35, expected the RBI to hike by 35 basis points to 5.25% at its meeting next month, while 14 expect a smaller quarter-point hike. Nine said the RBI would raise by 50 basis points, one said 40 and one said 30.

While India remains one of the fastest-growing major economies, growth is forecast to average 7.2% this fiscal year, slightly lower than the 7.5% pace estimated in a previous Reuters poll, and in line with the RBI's 7.2% projection.

"The less-appreciated challenge for the Indian economy is the fact domestic demand is weak...simply because jobs are not being generated to the extent they should have,” Kunal Kundu, an economist at Societe Generale was quoted by NDTV.

The extent of domestic demand can be ascertained beyond doubt by the latest figures on unemployment. The CMIE estimates show how 1.3 crore jobs were lost in the month of June. According to a NewsClick report, in May, the number of employed persons were 40.4 crore which plummeted to just 39.1 crore by June end. An employment level of 39 crore means that only about 36% of the working-age population is actually employed in India.

The labour participation rate (LPR) – the share of people who are working or willing and seeking to work – has also dropped from 39.91% in May to a low of 38.3% in June. This is the lowest LPR since the first lockdown back in April-May 2020. A reduced LPR means that hopeless and frustrated people have quit the labour force altogether, preferring to perhaps wait it out till jobs become available again.

A weakening rupee has exacerbated the issue further. The currency, already down over 6 per cent for the year due to higher oil prices - India's biggest import - was expected to set a new record low of 80 to the dollar by September, a separate Reuters poll found.

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