scorecardresearch

Inflation Shocker: As CPI inflation hits 8-year high, experts say brace for rapid RBI rate hikes

Analysts said this indicates the spectre of a generalisation of inflationary pressures which has seeped into everyday needs, adding that inflation is expected to remain above RBI’s upper limit threshold of 6 per cent for the most part of this year.

RBI, CPI inflation, rate hike
CPI inflation peaks to an eight year high in April, government data shows. (File: Reuters)

Consumer Price Index (CPI) inflation in April accelerated to 7.8 per cent, the highest level in eight years, and higher than analyst expectations, driven by higher prices of essential food items (such as cereals, fruits, and milk) and motor and cooking fuel. Analysts said this indicates the spectre of a generalisation of inflationary pressures which has seeped into everyday needs, adding that inflation is expected to remain above RBI’s upper limit threshold of 6 per cent for the most part of this year. Experts expect the latest reading to put pressure on the Reserve Bank of India to further raise rates as much as 50 basis points (bps) in the upcoming June monetary policy (MPC) meeting.

‘Inflation may remain above RBI’s target band for three quarters marking first official ‘failure’ of monetary framework’: Rahul Bajoria, Chief India Economist, Barclays.

“Rising price pressures remain a cause of concern, and are likely to reduce the space available for policy support. Our calculations suggest that inflation could remain above the RBI’s target band for three consecutive quarters (Q1-Q3 2022), marking the first official ‘failure’ of the monetary framework. Today’s upside surprise in inflation also sets up the RBI to undertake another inflation forecast revision, a factor which could have prompted the MPC’s inter meeting rate hike undertaken in early May,” Rahul Bajoria, Chief India Economist, Barclays said.

“We expect the RBI to follow up with at least one 50 bps rate hike starting with the June policy meeting, and then slow the cycle in August to 25 bps hike. We see the RBI raising policy rates to 5.15% by August, and expect it to reassess macroeconomic momentum to gauge the need for further hikes beyond that,” Bajoria added.

‘Triple whammy of commodity-price shocks, supply-chain shocks and resilient growth’: Madhavi Arora, Lead Economist, Emkay Global Financial Services

“The inflation shocker in May attributes to broad-based segmented gains in food, energy and core,” Madhavi Arora, Lead Economist, Emkay Global Financial Services said. “Overall rising price pressures remain a cause of concern, and are likely to pressure MPC further. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favour of inflation containment. The RBI no longer thinks the output sacrifice required to tame somewhat supply-driven inflation can be so high on net. The RBI’s reaction function is now evolving with fluid macro realities.”

“We see June’s policy to be super-live, and the MPC may front-load rates by another 25bps-40bps. The terminal rate may be around or a tad higher than 5.50 per cent, with the RBI now showing its intent to keep real rates neutral or above,” Arora said.

‘Do not expect inflation to go below 6 per cent this year’: Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

“April headline inflation print is likely to be the peak for the year. However, we do not expect inflation to go below 6 per cent for the rest of the year with prints over next few months remaining around 7-7.5 per cent. Over the next few months we should be focusing on movement in edible oils, crude prices and fuel price hikes, kharif MSP announcement, and pass-through of input prices by the companies to glean on the inflation trajectory,” Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said. “On the monetary policy front, we expect the RBI to hike repo rate by 35-40 bps along with 50 bps hike in CRR. In CY2022, from hereon, we expect repo rate hikes of 90-110 bps along with 50 bps of CRR hike. The RBI would aim to reduce liquidity along with reverting to above 5.15 per cent level of repo rate as soon as possible,” Rakshit added.

‘95-month high CPI inflation justified RBI’s off cycle rate hike’ : Aditi Nayar, Chief Economist, ICRA Limited

“The surge in the CPI inflation has clearly justified the off cycle rate hike last week, and significantly raised the likelihood of a back-to-back rate increase in June 2022. We see a higher base softening the May 2022 CPI inflation print, although it will remain above 6.5 per cent,” Aditi Nayar, Chief Economist, ICRA Limited said. “We now foresee a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies to 5.15 per cent, followed by a pause to assess the impact of growth. As of now, we continue to see the terminal rate at 5.5 per cent by the middle of 2023,” Nayar added.

“The sequential rise in the retail prices of several food items in the early part of May 2022 is likely to keep the food inflation elevated in the month, although a high base may soften the YoY inflation reading from April 2022 highs,” Nayar said.

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.