Finance Secretary Expects CPI Inflation To Come Down, Says Peaked At 7.44% In July

Finance Secretary TV Somanathan in an interview on Thursday said that CPI inflation has peaked at 7.44% in July 2023 and is expected to calm down going forward onward. The consumer price index (CPI) has accelerated to the highest level in 15 months, and higher higher than expectations.

In July 2023, CPI or retail inflation accelerated to 7.44%, the highest level since April 2022. This huge upside is due to a sharp spike in food prices. Food inflation zoomed to 11.51%. Inflation has also breached RBI's upper tolerance limit for the first time since March 2023.

In an interview with MoneyControl, Somanathan said that even as the finance ministry expects CPI numbers to cool down going ahead, the government will continue to take more steps to contain inflation but avoid any knee-jerk reactions. He further added that the government has already taken a sufficient number of steps to keep a lid on inflation and the prices of vegetables, the component most responsible for higher headline retail numbers, should start easing soon.

In the August monetary policy, RBI kept the repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50% for the third time in a row. Accordingly, the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

Also, MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

RBI's medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2%, while supporting growth.

While Somanathan expects inflation to ease after July month's peak, however, RBI governor Shaktikanta Das had hinted that inflation will rise in July and August during the monetary policy announcement earlier in the current month.

RBI governor on August 10 said, "Headline inflation, after reaching a low of 4.3 per cent in May 2023, rose in June and is expected to surge during July-August led by vegetable prices. While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed southwest monsoon so far. These developments warrant a heightened vigil on the evolving inflation trajectory."

"The cumulative rate hike of 250 basis points undertaken by the MPC is working its way into the economy. Nonetheless, domestic economic activity is holding up well and is likely to retain its momentum, despite weak external demand. Considering this confluence of factors, the MPC decided to remain watchful and evaluate the emerging situation. Consequently, the MPC decided to keep the policy repo rate unchanged at 6.50% with preparedness to act, should the situation so warrant," Das added.

He also said that the MPC remains resolute in its commitment to aligning inflation to the 4% target and anchoring inflation expectations.

Experts believe that since inflation accelerated higher than expected in July, the possibility of rate hikes is on the cards again from RBI going ahead.

RBI raised its CPI inflation target to 5.4% in FY24.