In our assessment, CPI inflation is likely to average close to 5.0% in FY22, not far from RBI’s recently revised estimate of 5.1%. This will definitely come as a reprieve compared to FY21 average inflation of 6.2%. However, increasingly this outlook of probable comfort is getting challenged amidst several upside risks seemingly gaining ground - WPI inflation at never seen before levels, retail price of petrol and diesel reigning at record highs, inflation expectations lingering in double-digits and global commodity prices persistently on an uptrend.
We argue, and with a reasonable degree of confidence, that countervailing forces in the form of - a strong downdraft in food inflation, a negative output gap further limiting the passthrough from WPI to CPI inflation, along with demand side price pressures remaining in abeyance for at least H1 FY22 can counter the imminent upside risks to CPI inflation to a large extent. In addition, government intervention on supply management of select food items (pulses, cereals) and/or fiscally tough but imaginable reduction in excise duty on fuel products can keep some additional price pressures in check at the fringe. Having said so, upside risks to our inflation outlook can transpire but more so from shocks/unsuspected outcomes of – 1) An unfavourable monsoon outturn and 2) Unrelenting spurt in global commodity prices especially crude oil above USD 75 pb on a sustained basis. To sum up, the big picture on inflation outlook appears one of a “guarded optimism” perched on an equi-balanced scale (of upside and downside risks).
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