Hike rates

Despite rising inflation, RBI not expected to raise rates until August

Swiss brokerage UBS Securities India only sees policy change from the second half, with the Monetary Policy Committee (MPC) able to propose a 50 basis point hike in the second half from August policy.

India’s retail price inflation exceeded the upper limit of the RBI’s tolerance band, accelerating to a seven-month high of 6.01% in January from a year earlier, although the governor from the central bank said there was no need to panic.

Consumer prices, buoyed by rising costs for food, fuel and household items, rose 6.01% in January, from a revised 5.66% the previous month, according to data from the Department of Statistics. .

However, many economists are warning that despite the RBI’s expectation of easing inflationary pressures, rising oil and food prices pose a risk of further inflation, noting rising oil and food prices. other factors.

“Rising Brent prices triggered by geopolitical tensions, rupiah depreciation bias and risk of imported inflation pose major risks to (the) inflation scenario,” said Rupa Rege Nitsure, Chief Economist of the L&T Financial Holdings group, Mumbai.

Economists said the RBI may be underestimating inflationary pressures in the coming year, but may not raise key rates anytime soon amid pressures to support the economic recovery.

“For now, we expect the RBI to refrain from changing rates ahead of the August policy (meeting),” said Sakshi Gupta, an economist at HDFC Bank.

Wholesale inflation remained in double digits at 12.96%.

The government has also revised CPI inflation for December 2021 upwards to 5.66 from 5.59%.

Rising inflation for statistical reasons

RBI Governor Shaktikanta Das had said that the rise in inflation was mainly due to statistical reasons, especially in the third quarter of FY22, and the same base effect will play out in different ways in the coming months.

Das had said that the RBI had already taken into account the high inflation figures in its recent fortnightly monetary policy, and that retail price inflation in January above 6% “should not surprise or create alarm. “.

The RBI’s MPC left the benchmark repo rate unchanged at 4.0% last week, sticking to its accommodative policy to help the economy recover from the pandemic.

RBI expects retail price inflation to soften to 4.5% in the next financial year, while projecting it at 5.3% for 2021-22 and on that basis it left all key rates unchanged and maintained its accommodating stance.

Tanvee Gupta-Jain, chief economist at UBS Securities India, said the latest figures are in line with expectations and the rise was largely due to an unfavorable base effect and continued supply-side constraints.

Core inflation remained stable at 6% versus 6.1% the previous month, reflecting the gradual pass-through of rising input costs to consumers.

She also said price pressure in rural areas is higher at 6.1% than in urban areas, which was slightly lower at 5.9%.

She expects retail inflation to remain elevated in the 5.5-6% range until April, given the massive spike in commodity prices, especially oil, side supply side as well as mounting input cost pressures that will keep inflation higher in the coming months.

Although the CPI will remain high until April 2022, before falling back towards 5% from the June quarter, when oil prices are expected to start falling due to increased supply, she expects expect the MPC to keep the repo rate unchanged through the first half of FY23, before delivering an initial policy hike in August and a cumulative 50 basis point hike in the second half.

She added that UBS expects that over the next two to three months supply is likely to remain constrained and that the macroeconomic backdrop, given China’s stimulus, will remain favorable and that an impact significant drop in crude prices will be visible over the next 6 months to a year. .

With the contributions of the agency

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