Retail inflation to cool off in 2nd half of FY'19: Experts

Retail inflation is expected to edge up further but will cool off in the second half of the ongoing financial year 2018-19, experts say.

According to global brokerage majors like Bank of America Merrill Lynch (BofAML), Deutsche Bank and UBS, further rise in CPI inflation would be owing to negative base effect and as the trigger wears off, inflation would reduce gradually.

BofAML in a research note said, it expects inflation to cool off to 4.2 per cent in the second half of 2018-19 (verses RBI's 4.7 per cent) as base effect fades.

"In our view, fundamentals do not support higher inflation. Growth remains weak with capacity utilisation running at sub-75 per cent. Although base effect will likely sustain growth at 7.5 per cent till September, it should slip to 7 per cent in second half of 2018-19," it added.

According to Deutsche Bank report, inflation is likely to head higher in June, (around 5.1-5.3 per cent), which will mark the peak of inflation in this cycle.

"With the base effect remaining adverse, CPI inflation is likely to head higher in June, (around 5.1-5.3 per cent), which will mark the peak of inflation in this cycle," the report said.

It added that post June, as the negative base effect wears off, inflation is likely to reduce gradually, allowing a drop towards 4 per cent by December, to rise thereafter to 4.5-4.6 per cent by end-March 2019.

Swiss brokerage UBS also expects "CPI inflation to average about 5 per cent year-on-year in 2018-19(versus RBI's forecasts of 4.8-4.9 per cent in first half and 4.7 per cent in second half)".

According to official data, retail inflation jumped to 4-month high of 4.87 per cent in May.

Retail inflation is a key input for RBI to decide on its key rate.

In its latest policy review earlier this month, RBI raised the repo rate - at which it lends to banks - by 0.25 per cent to 6.25 per cent, the first hike in more than four years due to growing concerns about inflation stoked by rising global oil prices and price rise at the domestic front.