RBI Governor Shaktikanta Das (Image: ANI)
On April 12, official data showed retail inflation jumped to a 17-month high of 6.95 percent in March from 6.07 percent in February driven by high food prices. The Consumer Price Index (CPI) inflation print for March is well above the consensus estimate. As per a Reuters poll, economists had expected CPI inflation to rise to 6.35 percent.
The latest inflation print confirms the monetary policy committee (MPC) assessment that persistently high inflation is a bigger worry for policymakers going ahead. The MPC has a mandate to keep inflation in the 2-6 percent band and a breach of three consecutive quarters will require the panel to explain to Parliament why it failed to keep inflation within the band.
How will high inflation affect the interest rate policy going ahead?
Most economists expect the MPC to change the rate stance to ‘neutral’ in June and follow up with a rate hike in the key policy rate (repo) at which the central bank lends short-term funds to banks. A 25 basis point rate hike in repo coupled with a change in rate stance now looks very likely, said Barclays in a note.
“CPI inflation exceeded the RBI’s target range materially, as rising food, logistics and energy prices added to inflation. We revise our CPI forecasts to 5.8% for FY22-23, and now expect four 25bp rate hikes from the RBI in FY22-23, starting from June’s MPC meeting,” said Barclays.
In the last policy review, the inflation projection was raised to 5.7 percent for FY23 from 4.5 percent, a clear acknowledgement that inflation concerns cannot be ignored by the rate-setting panel in search of growth.
At the press conference that followed the policy announcement, RBI Governor Shaktikanta Das acknowledged that inflation was now the first priority for MPC now. “We have now put inflation before growth in the sequence of priorities,” said Das.
Inflation trajectory of April-May will be crucial. If inflation concerns persist and there are no deep shocks to growth, interest rates will be hiked later this year. Persistently high inflation is highly worrying in an economy as it hurts low-income groups the most.
In other words, rising inflation snatches the fruits of economic recovery from the poor. Hence, the policymakers cannot ignore persistently high prices for long. Economists expect April inflation print to breach the 7 percent mark.
“Accounting for the available high-frequency prices and today’s data, we are now currently tracking April CPI at around 7.1% y/y, which will continue to keep inflationary concerns intact in the RBI’s mind, going into the June policy meeting,” according to the Barclays note.
To sum up, as it appears now, a rate hike in June is fairly certain which will be the first in a series of rate hikes this year.
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