At least 59% of the acceleration in inflation is attributable to the impact of the geopolitical conflict sparked by the Russian invasion of Ukraine, SBI economists said on Monday.
Faced with the heightened inflation situation, the headline figure touched nearly 7.8% for April, and the RBI is expected to raise rates by another 0.75% to bring the repo rate back to the pre-pandemic level of 5, 15%, they added.
Economists said they carried out a study of the impact of the Russian invasion on inflation, which found that 59% of the rise in prices is due to geopolitical events.
Using February as the base case, the study found that due to the war alone, food and beverages, fuel, lighting and transport contributed 52% of the increase, while another 7% impact came from higher input prices for the FMCG sector. .
Stating that inflation is unlikely to correct anytime soon, the note said there is a difference between rural and urban areas when it comes to rising prices. The former are more affected by rising food price pressures, while the latter are more affected due to rising fuel prices.
“Against the continued rise in inflation, it is now almost certain that the RBI will raise rates in the next June and August policy and bring it back to the pre-pandemic level of 5.15% by August. “, he said, adding that the biggest question the central bank must ask is whether inflation will significantly slow due to such rate hikes if the war-related disruptions do not ease quickly.
He also needs to check whether growth could be a big casualty in the event of large and persistent rate hikes, although inflation impressions will continue to be a serious concern, the note adds.
Supporting the RBI in its moves to stifle inflation through rate hikes, economists said the hikes could also have a positive impact.
“A higher interest rate will also be positive for the financial system as risks will be reassessed,” he said.
They also advocated for RBI interventions in the NDF (non-deliverable forwards) market instead of the onshore market through banks to support the rupee as this has the advantage of not affecting the liquidity of the rupee. .
“It will also save foreign exchange reserves, with only settlement of the differential amount with counterparties on the due dates,” they added.
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