Electricity, gas tariffs likely to go up in February

A sharp rupee depreciation evoked mixed feelings among the market participants. On the one hand, the country moving towards the market-driven exchange rate is another step closer to progressing towards the ninth International Monetary Fund (IMF) review — critical for unlocking the foreign exchange inflows at a time when the import cover is down to a couple of weeks.

On the other, it raises concerns over the impact of the immediate fall in the rupee impacting inflation. The concerns stand exacerbated by the POL product hike announcement of Rs35/litre.

In our note, we dissect the Consumer Price Index (CPI) basket and analyse the impact of the rupee movement on inflation in various scenarios.

In our current base case, we had already incorporated 40 per cent gas price increase, 20 per cent power tariff raise and the resumption of the general sales tax (GST) on petroleum products in February 2023.

Hence, this includes Rs35/litre hike in petrol prices and another Rs40/litre for GST application. Beyond the measures, we take a higher month-on-month inflation increase of 80 basis points, compared with the historical average of 70 basis points and the present scenario analysis of various month-on-month paces.

First, assuming most rupee adjustment against the dollar has materialised, we expect a higher MoM CPI for the coming months; followed by softer MoM readings in subsequent months. The same would also then increase the base for the third quarter of FY24’s CPI, reducing the CPI pace for FY24.

This would mean higher CPI levels from the current base case in immediate months and the reversion to earlier forecasts beyond that.

The second scenario would be further rupee depreciation from here. In this scenario, the CPI levels may witness a parallel upward shift from the current base case estimates.

In any scenario, 30 per cent+ CPI months now seem inevitable. This would further create pressure on the monetary stance, which has been on a tightening mode for over a year to anchor inflation.