Pricing pressure: Further rate action is likely as pricing pressure could continue above 6%, economists say

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The omission of inflation and growth projections by the Monetary Policy Committee after its two-day meeting has raised concerns that the inflationary damage wrought by the Russia-Ukraine crisis could be far greater than Indian policymakers initially thought.

Some economists are now forecasting more rate hikes over the course of the year as price pressure could hold above the Reserve Bank of India’s upper 6% tolerance range in the longer term.

“Increased uncertainty surrounds the path of inflation, which is highly dependent on geopolitical developments. Global commodity price dynamics are guiding the path of food inflation in India, including the prices of items inflation-sensitive who are being hit by global shortages due to production losses and export restrictions by major producing countries,” RBI Governor Shaktikanta Das said after surprising the market with a 40% hike. basis points in the repo rate and a 50 basis point increase in the cash reserve ratio.

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

“Looking ahead, given the hawkish rhetoric and the high likelihood of inflation printing high for April, the RBI will accelerate further hikes,” said Rahul Bajoria, Managing Director and Chief Economist for the India at Barclays.

“We expect the RBI to now hike rates by at least 50 basis points at the June policy meeting. We see the RBI raising policy rates to 5.15% by August, and we expect it to reassess macroeconomic dynamics to assess the need for further hikes beyond that,” he said.

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

“All of these factors confer significant upside risks to the inflation path set out in the MPC’s April statement,” RBI said.

The RBI had forecast inflation at 5.7% for FY23, with inflation in Q1 at 6.3%, Q2 at 5.8%, Q3 at 5.4% and Q4 at 5.1%.

India’s consumer price index (CPI) hit a 17-month high of 6.95% in March, topping the RBI’s upper tolerance range of 6%.

“We expect the printed CPI to rise further over the next two to three months, which will reflect the impact of retail fuel prices as well as rising food inflation in categories such as l edible oil,” said Suman Chowdhury, analytical director at Acuite. Assessments and Research,

Since the MPC meeting in April 2022, RBI has estimated that downside risks have increased as disruptions, shortages and price escalation triggered by geopolitical tensions and sanctions persist. The International Monetary Fund (IMF) has revised its global output growth forecast for 2022 down 0.8 percentage points to 3.6%, in less than three months. The World Trade Organization has cut the world trade growth projection for 2022 by 1.7 percentage points to 3%.

Bank of Baroda Chief Economist Madan Sabnavis said there would be more policy measures taken over time depending on how the inflationary situation develops. “We were expecting a 50 basis point increase in the repo rate in calendar year 2022, but we now expect there to be a further 50 basis point increase in the year,” he said. he declared.

“The focus on inflation is important because it goes back to the normal mandate of the MPC which is to rein in inflation because growth seems to be in a better position today. But not tackling inflation now, the growth can be compromised,” he said.

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