India’s CPI inflation jumping to a 3-month high of 6.52% in January may likely cause RBI Monetary Policy Committee (MPC) to continue with interest rate hikes. After RBI raised the key policy rate by 25 bps last week to 6.50%, economists believed that it would be the end of rate hike in the current cycle. However, with inflation taking a U-turn to climb above RBI’s threshold once again after falling for three months in a row, experts say that CPI print is suggesting that another rate hike may be in the offing in April 2023.
Elevated inflation in January concerning
The January CPI inflation print at 6.52% is a cause of concern, it is a 3-month high. The sudden spike in the inflation numbers, when the central bank was showing signs of comfort with the inflation trend, is likely to have a bearing on the rate action. If the inflation stays elevated for another month or two, it will have a negative impact in the form of another rate hike in April and further liquidity tightening,” said Nish Bhatt, Founder & CEO, Millwood Kane International.
Risk of more interest rate hikes increase
According to Rahul Bajoria, MD & Head of EM Asia Economics, Barclays, January’s inflation data came as another shock, especially in the context of the governor’s quite hawkish remarks at the MPC meeting on 8 February, and while it validates the RBI’s core hawkish stance, it goes against its inflation trajectory. “While there is a possibility of February inflation being above 6% (we are tracking February CPI at 6.3%), the direction of travel on CPI inflation is still lower, not higher. As such, while risks of another rate hike in April have risen after today’s print, we do not believe it will materially alter the terminal rate, since the bulk of the upside was driven by food, not by core inflation,” he said.
25 bps repo rate hike in April MPC likely
Much of the sharp increase in inflation last month is due to high cereal price inflation and partly due to an unfavourable base. However, with cereal prices staying on the upside, economists believe that inflation could remain around the 5.5-6% mark in the near term. “The hawkish tone of the RBI in the February policy seems justified with both headline and core inflation (at 6.4% in January) remaining sticky and elevated. The RBI is unlikely to change its stance in the April policy while a 25 bps hike is a distinct possibility now compared to a larger probability of pause earlier,” said Suvodeep Rakshit, Senior economist at Kotak Institutional Equities.
RBI is unlikely to stop rate hike cycle soon
So far in FY23, inflation has averaged at 6.8%, 200bps higher than the 5-year average witnessed between FY17-22. “In the coming months, revival in service sector which could potentially boost demand would further add to inflationary pressure, especially in the core categories. As inflationary pressure continues to sustain, in our view, the RBI is unlikely to stop its rate hike cycle any time soon. We expect the moderate pace of repo rate hike to continue for the next few MPC meetings in FY24,” said Vivek Rathi, Director-Research, Knight Frank India.
RBi MPC to maintain ‘withdrawal of accommodation’ stance
Given the print for Jan-23, CPI inflation for the current quarter is unlikely to remain below 6.0% although RBI has revised its forecast down to 5.6%. In the light of the unexpected inflation trajectory, the likelihood of a further hike in interest rates in the next MPC has surely increased, according to Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research. “It’s unlikely that the MPC will opt for a pause in an environment where both the headline CPI inflation and the core inflation doesn’t come down sustainably below 6%. Further, the monetary stance on “withdrawal of accommodation” is expected to continue in the near term. This may also lead to a hardening of rates in the bond market,” Chowdhary said.