Inflation above RBI’s comfort zone for three full quarters; brace for 35-50 bps rate hike by MPC, say analysts | The Financial Express

Inflation above RBI’s comfort zone for three full quarters; brace for 35-50 bps rate hike by MPC, say analysts

The food inflation in September spiked to a 22-month high of 8.41 per cent from August levels of 7.62 per cent. Going forward, the monetary policy committee is expected to announce yet another rate hike somewhere in the range of 35-50 basis points (bps), analysts said.

Inflation above RBI’s comfort zone for three full quarters; brace for 35-50 bps rate hike by MPC, say analysts
The CPI inflation is likely to soften and fall in the vicinity of RBI’s comfort zone of 2-4 per cent, no earlier than Q1FY24. Image: PTI

India’s retail inflation remained above the Reserve Bank of India’s upper threshold of 6 per cent for the ninth month in a row, surging to 7.41 per cent in September 2022. The numbers were notably higher than the RBI’s projection of 7.1 per cent for the second quarter of this fiscal. It was a sharp rise from the 7 per cent in the previous month, fuelled by high food prices. The food inflation in September spiked to a 22-month high of 8.41 per cent from August levels of 7.62 per cent. Going forward, the monetary policy committee is expected to announce yet another rate hike somewhere in the range of 35-50 basis points (bps), analysts said. The CPI inflation is likely to soften and fall in the vicinity of RBI’s comfort zone of 2-4 per cent, no earlier than Q1FY24.

Also Read: India’s CPI inflation surges to 5-month high of 7.41% in September; above RBI threshold for 9th month in a row

Erratic rainfall poses upside risk to food inflation outlook.

“Another rate hike is certain in the December 2022 MPC review, after the uncomfortable inflation print of 7.4% for September 2022. The quantum of the next rate hike will be determined by how much the inflation print recedes in October 2022, as well as the strength of the GDP growth for Q2 FY2023,” said Aditi Nayar, Chief Economist, ICRA. “The excessive rainfall in early October 2022 may adversely impact the kharif harvest and delay rabi sowing, thereby posing a material upside risk to the food inflation outlook.”

Food prices expected to soften in October

“The CPI for the month of September rose by 7.41% on-year, slightly higher than the consensus estimate of 7.3%. High food prices, esp cereal prices contributed the most behind this jump in CPI. Cereal prices jumped by 11.53% on-year mainly led by rice and wheat. A decline in acreage under rice and pulses and erratic rains are weighing on food prices. However, we might see some softening in food prices in October as a result of sequential reversal in food prices,” said Ritika Chhabra, Economist and Quant Analyst, Prabhudas Lilladher.

Combination of slightly higher inflation and fall in IIP raises concerns

The Index for Industrial Production (IIP) declined 0.8 per cent on-year which, when combined with the slightly higher retail inflation, can raise concerns for the future trajectory, says Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services. “Overall, the combination of slightly higher inflation and fall in IIP raises concerns. However, next month data and US Fed’s policy will decide whether we see a 35 or 50bp hike by the RBI in Dec’22. In any case, we continue to expect that the terminal rate will be 6.5% and there will be a pause in global monetary policy in CY23.”

Possibility tilted towards another hike, October’s inflation expected at 6.2 per cent

The RBI could deliver a rate hike of 35 bp at the December MPC meeting, bringing the repo rate to 6.25 per cent, before shifting to a neutral stance, said Rahul Bajoria, Barclays India chief economist. The international commodity prices coming off their high could bring down the headline inflation in the coming months. “Accounting for the available high-frequency prices and today’s data, we currently track October inflation at 6.2% on-year,” he added.

RBI’s next move to be more “data dependent”

“Although broadly in line with expectations, the CPI data continues to remain elevated. The surge in prices of cereals, vegetables and pulses is continuing into October as well. The unseasonal rains are further expected to keep the food prices volatile. We expect RBI to hike repo rate by 35-50bps in the December policy, with the next move being more data dependent,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

Inflation expected to remain above 6 per cent till February 2023

“We believe that the September inflation print should keep the RBI on course for a 35 bps hike in December with inflation remaining above 6% at least till February 2023 and reduce gradually towards the 4.5-5.5% range in FY2024. External sector concerns as well as uncertainty on energy prices will keep the RBI’s policy contingent on incremental data and events,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. Lower acreage and unseasonal rainfall will maintain the upward momentum in food prices.

Continuing depreciation of rupee, combined with high inflation to chart MPC’s course

“In our opinion, the likelihood of a moderate hike of 35-40 bps in the repo rate in Dec-22 is high given not only the inflation print but also the pressure on the currency. The systemic liquidity will also get tighter and will start getting reflected through a rise in bank deposit rates to the extent of 100-150 bps over the next few months,” said Suman Chowdhary, Chief Analytics Officer, Acuite Ratings & Research. However, Chowdhary expects the average inflation in the second half of this fiscal to gradually moderate due to softening commodity prices and slowdown in global economic activity.

Also Read: Petrol and Diesel Price Today, 13 Oct 2022: Fuel prices steady; Check rates in Delhi, Mumbai, other cities

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First published on: 13-10-2022 at 11:22:35 am
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