Indian inflation accelerates further in May, RBI likely to hike policy repo rate by 25 bps in August

The Indian headline and core inflation accelerated further in the month of May, but they also revealed a widespread rise at the component level. On a sequential basis, the headline CPI rose 0.51 percent, the most rapid in six months. The percentage of items in the CPI basket which saw sequential gains came in at 56 percent of total CPI items in May.

Within the components that saw major rises, the food and “transport and communication” categories accounted for the bulk of the rise. While the rise in food prices was mainly seasonal, higher transportation costs came on the back of a 9.9 percent sequential rise in India’s crude oil basket. These components are expected to have added 2 percentage points to headline inflation, stated ANZ in a research report.

Meanwhile, housing costs eased in the month, indicating that the effect of rise in house rent allowance for central government employees is starting to wane. But, housing inflation is expected to harden in the months ahead as the impact of similar measures by State governments begins to show up. This impact is likely to peak next June, assuming that half of all State governments have awarded the higher allowance on a staggered basis.

Core inflation also saw another solid print of 6.18 percent year-on-year in May. Stripping the housing component, core inflation was 5.56 percent year-on-year compared with 5.2 percent year-on-year in April.

The risks to inflation in the months ahead continue to be skewed to the upside. Increased crude oil prices, increase in rise in minimum support prices for summer crops, and the likelihood of a fiscal slippage underline these upside risks.

“The current trends in inflation as well as the upside risks suggest that the rate hiking cycle has not run its course. We continue to forecast one more rate hike of 25bps in the policy repo rate in August”, added ANZ.

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