A weak winter crop would potentially be bad news for India’s inflation. But a bumper crop won’t make it good news either. That’s the assessment of HSBC Holdings Plc, which is now penciling in further monetary tightening.
(Bloomberg) — A weak winter crop would potentially be bad news for India’s inflation. But a bumper crop won’t make it good news either. That’s the assessment of HSBC Holdings Plc, which is now penciling in further monetary tightening.
A good harvest will boost farmers’ income and stoke rural demand, pressuring core inflation, HSBC economists Pranjul Bhandari and Aayushi Chaudhary wrote in a note Friday. “And, if the winter crop is weak due to last-minute weather disruptions, food inflation could remain high, even if rural incomes and core inflation fall.”
HSBC expects inflation to tread slightly higher than the Reserve Bank of India’s forecast at 5.4% in the year starting April 1. Core inflation, which strips out volatile food and fuel prices and is a major concern for policymakers, is estimated to come in at 5.5% in their view.
Read: Wheat and Rice Output Set to Climb to Record in India
Headline inflation topped estimates with a 6.52% reading last month, breaching the top-end of RBI’s target for the first time in three months.
While global commodity prices, which kept inflation elevated for most part of last year, have come down from their peak, “the upcoming inflation experience will likely come from the rural and informal sector demand rising back up after a long wait,” the economists said. That’s likely to push up the core inflation and force the RBI to go for another 25 basis point hike by June, they added.
“The RBI is carefully watching Fed action, global inflation and the rupee. Domestic inflation may not provide much breathing space either,” the economists said. “Brace for more RBI rate action.”
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