As interest rates continue at unprecedented low levels, the Reserve Bank India may start tightening the monetary policy and the gradual normalization of the policy is likely to start by the end of this financial year.
Although the retail inflation declined on sequentially in June, it remained above the 6 per cent threshold for the second consecutive month. CPI inflation moderated marginally to 6.26 per cent.
A Kotak report noted that peak in inflation may provide comfort to MPC.
"Softer-than-expected CPI inflation along with broad-based moderation in core inflation is expected to provide relief to the MPC to continue with the pro-growth policy guidance in the near term. While much depends on the incoming data, we expect the onset of gradual policy normalization towards the end of FY2022," it said.
Core inflation (CPI excluding food, fuel and pan, tobacco) moderated to 6.2 per cent, with flat sequential momentum following a surge of 1.5 per cent M-oM in May. After a broad-based increase in the components of core inflation in May, prices have risen a lot lesser in June across all categories except transport and communication.
"We expect core inflation to average 6.1 per cent in FY2022 (5.3 per cent in FY2021) amid pass-through of global commodity prices and pickup in demand across various services sectors through FY2022," it said.
While the headline inflation remains elevated above MPC's upper threshold of 6 per cent, June print suggests that inflation may have peaked and the trajectory in 3QFY22 will moderate towards an average of 4.7 per cent.
"We expect RBI to continue to maintain a pro-growth bias in the August policy focus given that a large part of the increase still remains supply-driven and, hence, transitory in nature," it said.
However, as economic activity begins to normalize with progress in vaccination, RBI's room to ignore the inflationary risks as well as a closing of the negative output gap will be restricted, prompting gradual monetary policy normalization from October, although much will depend on the evolution of the pandemic, vaccination, and data, it said.
