New Delhi, Sep 10 : August inflation numbers are expected to be elevated at around 7 per cent or even higher, a SBI Ecowrap report said on Thursday.
According to the report, if the base effect is the primary reason for the rise, then inflation could only come down to below 4 per cent possibly beyond December.
“However, it looks difficult to believe that supply disruptions would normalise against the huge upsurge in pandemic in rural areas and this now poses an upside risk to inflation numbers,” the report said.
“We are thus less hopeful of any rate cut in current fiscal, or at best 25 bps, as February MPC meeting would consider December inflation only.”
Besides, the report said there is now an emerging thought suggesting that “one should look through the current increase in inflation as episodic, and look through the cycle as price disruption is mostly induced from supply disruptions in food items that is perishable”.
“Interestingly, the gap between WPI and CPI is most often quoted as an example of the food induced increase in headline CPI,” the report said.
“However, a closer look at the WPI and CPI food basket reveals that food items have contributed to a jump in both the headline numbers, though the jump in CPI is magnified because of the disproportionately larger weight of food in CPI.”
The report pointed out, if WPI basket weights are replicated with that of CPI food basket, then the gap between food WPI and food CPI declines to around 150 basis points, “implying that all other things remaining unchanged, the decline in WPI because of factors than food is around 150 basis points”.
“We estimate that fuel and light contribute to around 110 points of such. Hence only 40 basis points is the difference between CPI and WPI on a comparable scale,” the report said.
“We estimate that the MSP impact is nearly identical at 39 basis points. Thus, we postulate that the jump in food prices is largely because of huge procurement by government and supply disruption that pushed up prices of cereal, potato, tomato and protein items.”
Furthermore, the report proposed that to make inflation targeting successful in the India’s context is to reach the 4 per cent target over a particular business cycle, rather than for a particular date such as two years ahead.
“This would encourage predictable inflation targeting in the face of persistent negative shocks and recently US Fed has also espoused such a conviction,” the report said.