*****More rate actions likely as price pressure may sustain over 6%, say economists – The Economic Times

lipped from: https://economictimes.indiatimes.com/news/economy/policy/more-rate-actions-likely-as-price-pressure-may-sustain-over-6-say-economists/articleshow/91316778.cms

Synopsis

Some economists are now anticipating more rate rises in the year as price pressure may sustain above the Reserve Bank of India’s 6% upper tolerance band for a longer term.

The skipping of inflation and growth projections by the Monetary Policy Committee after its two-day meeting raises fear that the inflationary damages triggered by the Russia-Ukraine crisis could be much more than what was originally thought by the Indian policymakers.

Some economists are now anticipating more rate rises in the year as price pressure may sustain above the Reserve Bank of India‘s 6% upper tolerance band for a longer term.

“Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation. Global commodity price dynamics are driving the path of food inflation in India, including prices of inflation sensitive items that are impacted by global shortages due to output losses and export restrictions by key producing countries,” is what RBI Governor Shaktikanta Das said, after surprising the market with a 40 basis points repo rate rise and a 50 basis points rise in cash reserve ratio.

The MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects.

“Looking ahead, given the hawkish rhetoric and high likelihood of an elevated inflation print for April, the RBI will be front-loading further hikes,” said Rahul Bajoria, managing director and chief India economist at Barclays.

“We expect the RBI to now deliver at least a 50 bps rate hike in the June policy meeting. We see the RBI raising policy rates to 5.15% by August, and expect it will reassess macroeconomic momentum to gauge the need for further hikes beyond that,” he said.

Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines, said RBI, adding that supply chain disruptions due to resurgence of Covid-19 infections in major economies could sustain higher logistics costs for longer.

“All these factors impart significant upside risks to the inflation trajectory set out in the April statement of the MPC,” RBI said.

The RBI had projected inflation at 5.7% for FY23, with first quarter inflation at 6.3%, second quarter at 5.8%, third quarter at 5.4% and fourth quarter at 5.1%.

India’s consumer price index (CPI) rose to a 17-month high of 6.95% in March, overshooting the RBI’s upper tolerance band of 6%.

“We expect a further rise in the CPI print over the next two-three months which will reflect the impact of retail fuel prices and also the increase in food inflation from categories such as edible oil,” said Suman Chowdhury, chief analytical officer at Acuite Ratings & Research,

Since the MPC’s meeting in April 2022, RBI felt that the downside risks grew as disruptions, shortages and escalating prices triggered by the geopolitical tensions and sanctions have persisted. The International Monetary Fund (IMF) revised its forecast of global output growth for 2022 down by 0.8 percentage point to 3.6%, in a span of less than three months. The World Trade Organization has scaled down the projection of world trade growth for 2022 by 1.7 percentage points to 3%.

Bank of Baroda chief economist Madan Sabnavis said that there would be more policy actions taken over time depending on the evolving inflationary situation. “We had expected a 50 bps increase in repo rate in calendar year 2022 but would now believe that there would be a further hike of 50 bps in the year,” he said.

“The overarching focus on inflation is significant as it goes back to the normal mandate of the MPC which is to curb inflation as growth seems to be better placed today. But not tackling inflation now, growth can be jeopardized,” he said.

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