Inflation too hot for RBI to cool down on rates, a 50-bps hike’s more likely

Synopsis

The Eurozone central bank raised rates by an unprecedented three-quarters of a percentage point last week to anchor inflationary expectations, while the US Federal Reserve has indicated it is not done with rate tightening just yet despite the very real threat of protracted economic contraction.

Agencies
The Russia-Ukraine military conflict has sparked off price rises across the board from energy to wheat. Developed economies including US, UK, Germany and France are all reeling under record high consumer prices.

Mumbai: India was expected to stand out from the rest of the developed world in limiting the pace of increases in its borrowing costs, but a spike in consumer prices last month will make it difficult for the central bank to immediately break ranks with its peers on either side of the Atlantic.

The Eurozone central bank raised rates by an unprecedented three-quarters of a percentage point last week to anchor inflationary expectations, while the US Federal Reserve has indicated it is not done with rate tightening just yet despite the very real threat of protracted economic contraction.

Against this backdrop, India seemed an island of tranquillity where growth was back on the front burner amid a visible softening in prices since April.

But August has changed that, and analysts now believe the Reserve Bank of India (RBI) may have to press ahead with another half-a-percentage-point increase in repo rate at the end of the month.

“At a time when India is aspiring for higher growth, the RBI cannot afford to let inflation derail the fiscal math,” said Madan Sabnavis, chief economist at

. “Sharper rate hikes may be expected before the central bank changes the rate cycle to spur economic growth.”

Retail inflation as measured by the consumer pr50 Bps rate Hike Likely ice index sprang a surprise in August with the gauge spurting to 7% versus 6.71% a month earlier. The RBI projected inflation at 6.7% by the year-end, with the July-September quarter at 7.1%.

In April, inflation appears to have peaked at 7.8%. US inflation print for August was at 8.3%, higher than average market expectation. It sent the US Treasury benchmark yields 6 bps higher to 3.42%.

Spill-overs from geopolitical shocks are causing considerable uncertainty to the inflation trajectory, the RBI said in its August monetary policy announcement. Sticky inflation and weakening growth increase the policy dilemma making it a top priority for the Monetary Policy Committee, which will announce its next decision on September 30.

At the margin, according to Nomura India, the August CPI data suggest that the September MPC decision may lie between a 35 bps and a 50 bps increase, rather than a 25 bps. One basis point is 0.01%.

On May 5, the RBI started raising the policy repo rate by 40 bps, tightening rates for the first time since 2019. Since then, the central bank has raised the benchmark gauge by 140 bps to 5.40%.

“We continue to expect an extension of the rate hiking cycle by another 50 bps to ensure real policy rate gets to positive territory in order to keep inflation within the target in FY24,” said Vivek Kumar, economist at QuantEco. “The Fed Policy could determine the near-term policy trajectory along with local factors like the anticipation of CPI inflation decelerating towards 6% in Q3 FY23 taking into account the overall monsoon impact.”

The Russia-Ukraine military conflict has sparked off price rises across the board from energy to wheat. Developed economies including US, UK, Germany and France are all reeling under record high consumer prices.

Wednesday, 14 Sep, 2022

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