After retail inflation printed close to 7% in March, economists have brought forward the expectation of a repo rate hike to June from August. Most of them expect the April consumer price index (CPI) reading to be even higher as the impact of fuel price hikes gets reflected in the headline figure.

The monetary policy committee (MPC) decided to hold the repo rate at 4% in its April meeting while maintaining that the stance will remain accommodative with a focus on the withdrawal of accommodation. The commentary from the rate-setting panel marked a hawkish turn in the course of monetary policy, with the Reserve Bank of India (RBI) stating unambiguously that inflation was now a bigger priority than growth.

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India (SBI), said the Russia-Ukraine conflict has significantly impacted the inflation trajectory. “We now expect a 25 basis point rate hike each in June and August, with a cumulative rate hike of 75 basis points in the cycle,” Ghosh said.

Given that the spread between g-sec yields and the repo rate tends to jump in an rising rate cycle, g-sec yields could touch 7.75% by September, according to Ghosh. “We believe RBI will keep the g-sec yields capped at 7.5% through unconventional policy measures,” he said.

The March inflation reading of 6.95% marked a 17-month high and was way above the MPC’s target band of 4-6%. Barclays revised its CPI forecast to 5.8% for FY23 and it now expects four 25-bps rate hikes during the year, starting with the June MPC meeting.

Inflation could be even higher in April, said Rahul Bajoria, MD & chief India economist, Barclays. “The pass through still was not completely reflected in the print, as retail fuel costs only began to rise at the end of the month, and on an average basis will rise further in April as well,” Bajoria said, adding that there may be two more quarters of inflation in excess of 6%, especially if energy prices remain elevated.

Resurgence of Covid infections in parts of the world could further exacerbate supply chain-related problems. Tanvee Gupta Jain, chief India economist, UBS Securities, said China’s tightening of Covid-related restrictions is a potential source of new supply chain disruption.

“The MPC recently signalled withdrawal of accommodation in the April policy and there is risk that rate hike cycle could begin earlier in June (vs. August) if inflation continues to remain elevated beyond 6% till then. We now expect 50-75 bps hike in repo (policy) rate in FY23,” Jain said.