The US consumer prices rose sharply in April and drove the rate of inflation to the highest level seen in nearly 13 years - 4.2 percent versus expectations of a 3.6 percent increase. Rob Subbaraman, Head-Global Macro Research of Nomura discussed its implications and trajectory.

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He believes that the retail inflation will go higher in May and in June it will rise further.

“So it is going to become even more challenging to talk about transitory but we do think after we get past June and get into Q3CY21, inflation will start to come off,” he said.

“Fed has a real job on its hand now, trying to continue to convince the markets saying be patient, don’t worry, this is not a cause for alarm. A lot of the inflation is due to supply disruptions and pent-up demand for services and when that starts to weigh in, inflation will be coming back down,” he added.

The predominant view amongst economists is that this inflation rise is temporary and that is the Nomura base case, he shared.

“Why we think it is going to come down is essentially what is driving it up, predominantly temporary things. The important thing is services prices are going up, there is pent up demand for that and as demand goes up, capacities increase over time. There is shortages of raw material, shortages of chips, shortages of labour but we think a lot of those things over time – and as prices go up, it attracts more supplies,” Subbaraman mentioned.

“We have a massive once in generation crisis, there can be structural changes and it could be that we are wrong and the inflation continues to run away,” he stated.

According to him, there are a lot of reasons why inflation can be sticky.

In terms of the COVID-19 impact on the Indian economy, he said, “There is going to be a sizeable impact in Q2 that we are in now. We think the gross domestic product (GDP) will probably fall by around 4 percent on a quarter on quarter (QoQ) basis this quarter. We are hopeful and optimistic that it is a short-term shock and that as we get into the next quarter come July, August, September, we will start to see a bounce back. This has been the pattern around the world.”

“Business resumption index for India – 100 is when everyone is working and things are normal – it has fallen to 65 percent. But in the first wave, it dropped to 45 percent. So it is not as bad. business are getting more adaptable in working from home, so the hit to the economy is nowhere near as bad as the first wave - a quarter of the size the impact is as the first wave,” he added.

Subbaraman believes, Reserve Bank of India is going to focus more on growth and maintain ample liquidity for now. “As we get later into the year, into Q4, we think the first step will be to reduce some of that liquidity and then in the first half of next year, 2022, we think the RBI will start raising rates,” he stated.

For the full interview, watch the video

(Edited by : Abhishek Jha)

First Published:May 14, 2021 1:15 PM IST