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RBI may raise interest rates to pre-pandemic level by August amid war-induced high inflation: SBI Research

“Against the continued increase in inflation, it is now almost certain that RBI will raise rates in forthcoming June and August policy and will take it to pre-pandemic level of 5.15% by August,” according to SBI Ecowrap.

Unlike advanced economies like the US, Inflation may take time to moderate in India, according to SBI Ecowrap.

The Reserve Bank of India will inevitably hike interest rates in the upcoming monetary policy meetings and may take the rates upto the pre-pandemic levels of 5.15 per cent as early as August due to biting inflation, according to an SBI research report. Food prices in rural areas and fuel prices in urban areas have risen sharply. This inflation is largely because of the Russia-Ukraine war which has put pressure on the supply chain, and hence it is futile to blame Reserve Bank of India (RBI) for the inflationary pressure, the report added.

“Using February as the base case (the beginning of the Ukraine and Russia conflict), our study reveals that because of war alone, Food and Beverages (assuming that vegetable price increase was mostly because of seasonal factors, that are largely domestic) and Fuel and Light & Transport contributed 52% of the increase in overall inflation since February. If we also add the impact of input costs particularly on the FMCG sector, thus adding the contribution of personal care and effects, the total impact at all India level comes to 59%, purely because of war,” according to the SBI Ecowrap published Monday.

“Against the continued increase in inflation, it is now almost certain that RBI will raise rates in forthcoming June and August policy and will take it to pre-pandemic level of 5.15% by August. However, the important challenge facing the central bank remains whether inflation will tread down meaningfully because of such rate hikes if war related disruptions do not subside quickly,” SBI Ecowrap, which has been authored by SBI Chief Economist Soumya Kanti Ghosh, added.

Unlike advanced economies like the US, Inflation may take time to moderate in India

The report also said inflation internals in India are different from the rest of the world. In countries such as the United States, even though inflation is at a 40-year-high, there has also been building pressure on wage growth. While in comparison in India, inflation is at a 8-year high, but wage growth has been soft. This is one point of caution and thus it will take time for inflation to moderate in India, SBI Research said.

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.

“In India nominal rural wages for both agricultural and non-agricultural labourers picked up during H2 FY22, with easing of restrictions/lockdowns imposed by states and restoration in economic activity. However, the wage growth has remained soft. The weighted contribution of wage growth in CPI build-up remains modest. Thus, even after rate hikes, inflation will take time to moderate in India,” the report said.

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