RBI may go for first repo rate hike in June: SBI report

The Reserve Bank of India (RBI) is expected to hike the repo rate by at least 50 basis points (bps), beginning June, according to an SBI's research report- Ecowrap. The bank said that it expects a 25 bps rate increase each in June and August, with a cumulative rate hike of 75 bps in the cycle.  

"With RBI prioritising inflation over growth, as stated by RBI Governor in post policy press conference, we now expect RBI to hike repo rate by at least 50 bps, beginning June," the report said on Wednesday. It further stated that yields are also likely to move up tracing yields in advance economies and Asian peers. The report added that the G-sec yields could touch 7.75% by September. 

"We believe, RBI will keep the G-sec yields capped at 7.5% through unconventional policy measures," it noted. 
The report stated that any extension of GST (goods and services tax) compensation beyond June 2022 and any additional borrowing to meet it will be another factor to watch for.

Also Read: RBI keeps repo rate unchanged at 4% for 11th time in a row

Inflation 

On the inflation front, the report said that CPI-based inflation surged to 6.95 per cent on-year basis in March 2022 as compared to 6.07 per cent in February 2022 mainly on account of food price inflation. 

It noted that inflation prints are now likely to stay higher than 7 per cent till September. Beyond September, the report stated that inflation could hover between 6.5 per cent to 7 per cent. "Our FY23 inflation forecast is now closer to 6.5%, taking into account the possibility of an extended food price shock," it said. 

The report highlighted that the Russia-Ukraine conflict has significantly impacted the trajectory of inflation. The latest March 2022 inflation shows wheat, protein items (chicken in particular), milk, refined oil, potato, chillies, kerosene, firewood, Gold and LPG contributing to overall inflation in a substantive manner. The conflict has pushed up prices of chicken abruptly as chicken feed imports from Ukraine are getting disrupted, it stated. 

"The pressure on sunflower oil supplies from Ukraine has led to change in export policy from Indonesia, thereby leading to lower palm oil imports. Further, the war has exacerbated crop loss concerns in South America which in turn has impacted soybean oil supplies," the report noted, adding that the prices of milk and refined oil have also jumped significantly. 

Also Read: Retail inflation surges to 6.95% in March, above RBI comfort band for third time

Regarding the fuel prices, the report stated that "surprisingly" the contribution of petrol and diesel in overall inflation has been declining steadily since October 2021, while there is a steady increase in the weighted contribution of kerosene and firewood in headline inflation. 

There is also a decline in the weighted contribution of LPG in headline inflation, it added.  

"We have already taken the impact of this pass through of WPI food inflation to CPI food inflation while estimating our average CPI of 5.5%-6% (oil price of $95-$100 per bbl). However, there is an additional factor that could lead to further upside risk to inflation in the next fiscal year," the report highlighted. 

Agriculture 

The report noted that there has been an increase in prices of various inputs used in agriculture and estimated that the cost of production is likely to increase by around 8-10 per cent. 

"Thus, CACP will have to take this higher cost of production into account while estimating Minimum Support Price (MSP) for FY23," it stated. 

Generally, the recommended MSP is calculated as 150% of the cost of production. MSP increase has been in the range of 3-5% in the past.  

In FY23, MSP should at least be higher by around 12-15%, the report estimated.