Retail and wholesale inflation accelerated in July and the uptrend is likely to continue in the coming months, limiting the space for further monetary easing, says a Morgan Stanley report.
According to the global financial services major, both CPI and WPI inflation have troughed in June and are expected to rise further in the coming months.
The wholesale inflation rose sharply to 1.88 per cent in July from 0.90 per cent in June 2017, mainly on account of turnaround in prices of food articles, especially vegetables.
Retail inflation jumped to 2.36 per cent in the month, chiefly driven by hardening of prices of sugar and confectionery items, pan, tobacco and intoxicants.
“We estimate August CPI and WPI inflation to rise further to 3.0 per cent and 2.1 per cent year-on-year, respectively, based on current trends in high-frequency food prices and global commodity prices,” Morgan Stanley said in the research note.
Post RBI’s rate cut by 25 bps earlier this month, the debate on further easing continues on expectation that inflationary pressures would remain subdued, providing the central bank with further room to ease.
However, Morgan Stanley maintains that RBI is unlikely to take up any further cuts as inflation is expected to gradually edge back towards the target of 4 per cent. The report said on expectation of CPI inflation rising further in August, the incoming data prints will likely mean that the MPC may adopt a wait and watch approach in the October meeting by keeping rates on hold.
For easing of monetary policy, the report said, there is a need to see further deceleration in underlying inflation pressures.