Inflation is hurting; from fuel to edible oil, packaged goods and even automobiles, prices have surged. Consumer Price Index (CPI) inflation for March turned in at 6.95 per cent—nearly a per cent more than the upper end of the Reserve Bank of India’s targeted 2-6 per cent band.
With fuel companies raising petrol and diesel prices from the end of March, the inflation print in April could be further higher.“For FY23, inflation drivers are likely to face considerable pressure from persistent hardening of input prices. What started as a supply side disruption (exacerbated by elevated transportation costs and aided by a recovery in global demand) in major part of FY22, later gave way to a spike in geopolitical risk premium on account of the ongoing conflict between Russia and Ukraine,” pointed analysts at Acuite Ratings and Research.
Speaking after the monetary policy committee (MPC) meeting last week, RBI Governor Shaktikanta Das had acknowledged rising inflation risk and clearly set the tone for more hawkish monetary policy in the year ahead, even as the repo rate was left unchanged at 4 per cent and an accommodative stance was also continued.
The RBI raised its retail inflation forecast for the current financial year to 5.7 per cent, from 4.5 per cent projected earlier. The Acuite analysts, however, feel there is a “significant likelihood” that CPI inflation will remain around 7 per cent for the next few months.
Given the higher than anticipated inflation spike, will the RBI shift its stance and raise rates faster than what was felt earlier?
“With the RBI prioritising inflation over growth from the April policy, the March inflation reading seals the case for a shift in the MPC’s stance to neutral in the June policy,” feels Upasna Bhardwaj, senior economist at Kotak Mahindra Bank.
While high commodity prices and supply chain disruptions will weigh on inflation, aggressive monetary policy responses from global central banks could also force RBI to front load rate action, said Bhardwaj, who expects the central bank to raise the repo rate by 100 basis points in the year ending March 2023, with the first hike of 25 bps now expected in June, rather than August.
Sonal Varma, chief economist India and Asia (ex-Japan), echoed similar views that the rate hike cycle will begin in June with a 25 bps repo rate rise.
“At its April 8 meeting, the RBI was non-committal on its next steps, ambiguous on what accommodative stance means and had stated that it has started the process of moving towards a positive real repo rate, which implies a significant amount of policy course correction lies ahead,” said Varma.
Nomura now expects the RBI to raise the repo rate by 25 bps in each of the next 8 MPC meetings; cumulatively the repo rate is seen going up 200 bps to 6 per cent by the September quarter of 2023.
“The high inflation print of March-April 2022 may act to expedite the transition process and the probability of a repo rate hike in June 2022 can’t be ruled out,” said analysts at Acuite Ratings.
Nikhil Gupta, chief economist at Motilal Oswal Financial Services has a slightly different view.
“Our revised forecasts suggest average inflation of 6.2 per cent in FY2023, with inflation at or above 6 per cent in all months of the fiscal. Simultaneously, growth is likely to remain weaker-than-consensus, which will make it very difficult for the RBI to hike the policy repo rate aggressively,” said Gupta.
He still expects the RBI to raise repo rate by two-three times in the current financial year, with the first hike likely in August, although one in June will be a close call.
The US Federal Reserve already raised its benchmark rate in March and is expected to raise rates in all of its remaining meetings this year. The days of easy money policy in India too may be nearing an end and people here too may have to brace themselves for their borrowing costs rising.
