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Retail inflation in India is expected to rise "noticeably" from 'trough' in June to 4.4 per cent in the second half of this year, driven mostly by food prices and the base effect, says a Nomura report.
According to the Japanese financial services major, although inflation has bottomed, in the medium term it is expected to see a significant uptrend and rise above the RBI's target.
"In India, we expect CPI (Consumer Price Index) inflation to rise well above the Reserve Bank of India's mid-point target (4 per cent), with core inflation rising to 6.3 per cent in 2018, led by rural wages, minimum support prices, a closing output gap and the supply demand cobweb model of food prices starting to kick-in," Nomura said in a research note.
That apart, sharp moderation in CPI food inflation which happened in the second half of 2016 will cause adverse base effects to rise through the rest of 2017.
"We estimate that adverse base effects alone will add 1.5 pp and 0.4 pp to headline and core CPI inflation respectively, in second half 2017," the report noted.
Nomura believes CPI to have "troughed" in June and we expect it to rise gradually by end-2017, as deflation in food wanes, base effects turn adverse and higher house rent allowances (HRAs) for central government employees raises housing inflation from July.
Retail inflation hit a historically low level of 1.54 per cent in June on dip in food items like vegetables, pulses and milk products.
In 2018, cyclical factors such as rising rural wage growth, higher minimum support prices and a narrowing output gap is expected to push inflation higher, the report said.
"We expect headline and core CPI inflation to rise to 4.4 per cent and 5.2 per cent, respectively, by end-2017 and average 5.3 per cent and 6.3 per cent in 2018," the report added.