Even as the retail inflation is hovering at an eight-year-high level of 7.79 per cent remaining above the Reserve Bank of India’s (RBI) target limit for the fourth consecutive month in April, the Monetary Policy Committee (MPC) is now expected to continue with its rate hikes going forward. In an off-cycle monetary policy review, the MPC recently hiked the key repo rate by 40 basis points (bps) to control inflation.
The Consumer Price Index (CPI)-based inflation, which the RBI takes as a reference point while deciding on the monetary policy, in April 2022 soared to an eight-year high of 7.79 per cent. It is as compared with 4.23 per cent in April 2021 and 6.97 per cent in March 2022.
Rural inflation in April stood at a 12-year high of 8.4 per cent, while inflation in urban areas was at an 18-month high of 7.1 per cent in April 2022. Core inflation, which excludes changes in food and oil prices, in April also touched a 95-month high at 6.97 per cent.
The Reserve Bank of India is mandated to keep the retail inflation with the band of 2-6 per cent.
Rating agency Icra in its report said commodity price pressures emanating from supply disruptions amid global headwinds will keep the core inflation elevated in the coming months, although there has been some sequential moderation in prices of key commodities (steel, copper, aluminium, etc.) amid demand concerns from China. Overall, we see a higher base softening the May 2022 CPI inflation print, although it will remain above 6.5 per cent.
It added, “We now foresee a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies (scheduled in June and August 2022) to 5.15 per cent, followed by a pause to assess the impact of growth.”
It added that as of now, it sees the terminal repo rate in the current rate hike cycle at 5.5 per cent by the middle of 2023. A basis point is equal to 100th of a percentage point.
Sunil Kumar Sinha, principal economist at India Ratings and Research, said the RBI has increased the repo rate by 40 bps and CRR by 50 bps in May 2022. “India Ratings expects monetary tightening to continue and expects repo rates to increase by 60-75 bps and CRR by 50 bps in FY23. However, Ind-Ra believes the future rate hikes will be data-dependent.”
DSP Mutual Fund in its note said the RBI has already hiked 40 basis points in off-cycle policy. “It could deliver another 25 bps in the June 2022 policy. Repo rates will most probably reach pre-COVID-19 levels of 5.15 per cent, after which the pace of hikes could slow.”
Stating that escalation in CPI inflation to 7.79 per cent in April 2022 is stoked by high energy and food prices viz-a-viz uncertainty caused by geo-political conflict, PHDCCI President Pradeep Multani said, “We look forward to calibrated policy measures by the Government to address the supply constraints.”