High inflation could push the Reserve Bank of India to raise policy interest rates in the upcoming June meeting by as much as 50 basis points, economists said. Consumer Price Index inflation breached the RBI’s upper threshold of 6 per cent for the third time this year. The already high food and fuel prices are likely to remain elevated going forward, with some economists expecting inflation to remain near 7 per cent till September if energy prices remain elevated as a result of the Russia-Ukraine war. Experts earlier pegged a rate hike in August, with a formal change in stance in the upcoming June meeting.
Last week’s RBI’s monetary policy meeting indicates an imminent withdrawal of accommodation, and an important takeaway from the post policy conference call was the clear re-sequencing of priorities by the central bank with inflation now taking the lead, Bank of America (BofA) Global Research said. In this backdrop, the 7% CPI inflation print and a likely situation of CPI inflation breaching the 6% mark for three straight quarters going forward, would naturally make monetary policy setting more tricky in already uncertain times, BofA added. Last week, RBI Governor Shaktikanta Das said the central bank has raised inflation projections to 5.7 per cent for FY 2023 due to the implications from ongoing Ukraine war.
High edible oil prices, worsening supply chain due to Ukraine war to pinch Indians’ pockets
Economists at BoFa and Kotak Mahindra Bank expect the likelihood of a 25 basis points rate hike in the upcoming RBI MPC meeting. While SBI Research Ecowrap expects at least 50 basis points hike in the June meeting. Economists also expect inflation to go up to 7 per cent in the first half of the current fiscal, higher than earlier expectations amid weak signs of the Russia Ukraine war abating, which could further exacerbate supply chain issues, and inflate food and commodity prices. Inflation prints are now likely to stay higher than 7% till September, beyond September, inflation prints could hover in between 6.5%-7%, SBI said.
“The Russia-Ukraine conflict has significantly impacted the trajectory of inflation. The latest March’22 inflation print shows wheat, protein items (chicken in particular), milk, refined oil, potato, chillies, kerosene, firewood, Gold and LPG contributing to overall inflation in a substantive manner,” according to the SBI Research report. “The conflict has pushed up prices of chicken abruptly as chicken feed imports from Ukraine are getting disrupted. The pressure on sunflower oil supplies from Ukraine has led to change in export policy from Indonesia, thereby leading to lower palm oil imports. Further the war has exacerbated crop loss concerns in South America which in turn has impacted soybean oil supplies,” it added.
Await fourth consecutive threshold breach in next inflation readings when fuel price hike will be factored-in
Add to that, economists expect that factoring-in of spiking fuel prices would add to inflation woes. OMOs started to pass on rising crude oil prices to consumers only towards the February end, and the inflation for the month of March would likely cross RBI’s upper limit once again. The RBI is likely to get quite perturbed with three consecutive quarters of FY 2022 likely seeing inflation exceeding 6% and especially if energy prices remain elevated, Madhavi Arora, lead economist at Emkay said. Arora said she expects a June hike, with or without stout and formal stance change
“Headline CPI inflation trended materially higher in March, rising to 6.95% y/y, led by higher commodity prices, especially for energy and energy-intensive food products. 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,” Barclays said in a report. It is likely that India will see two more quarters of inflation in excess of 6%, especially if energy prices remain elevated, Barclays added.
