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The Reserve Bank of India (RBI) is much ahead of its curve in containing the inflation which is at a multi-year high and led to a 90 basis points rate hike in the last two monetary policies. SBI in its latest Ecowrap expects RBI to opt for an interest rate hike in August and October as inflation has peaked.
India's consumer price index (CPI) inflation moderated to 7.04% in May after reaching to 95-month (about 8 years) high of 7.79% in April. Inflation still stays ahead of RBI's comfort zone.
In May, core CPI also eased to 6.09% from 6.07% in April.
SBI in its research report said, in recent times, there have been commentaries that have questioned whether RBI has been behind the curve in controlling inflation, as reported by PTI.
SBI believes RBI is much ahead of the curve in controlling inflation and the Fed can borrow a template from RBI to control US inflation that is all-pervasive and threatens to rip apart global financial stability.
Soumya Kanti Ghosh, Group Chief Economic Adviser of SBI who authored the Ecowrap said that there are expectations that the RBI could factor in a rate hike in August (as inflation in June is likely to come above 7%) and even in October policy, and take it higher than the pre-pandemic level by October to 5.5%.
Further, the report said, "our peak rate at the end of the cycle now has now a higher probability of a lower bound of 5.5% and a lower probability of going up to 5.75%, depending on inflation trajectory."
Notably, the projections are purely data-dependent and subject to revisions, the report added.
RBI raised the policy repo rate by 40 basis points in May and further to 50 basis points in June. Now, the repo rate has increased to 4.9% to tackle high inflation.
SBI's average inflation forecast for FY23 is 6.7%, however, its quarterly inflation figures are slightly different from the central bank.
In June policy, RBI in its inflation outlook said, "the tense global geopolitical situation and the consequent elevated commodity prices impart considerable uncertainty to the domestic inflation outlook. The restrictions on wheat exports should improve the domestic supplies but the shortfall in the rabi production due to the heat wave could be an offsetting risk. The forecast of a normal south-west monsoon augurs well for the Kharif agricultural production and the food price outlook."
Further, RBI said that edible oil prices remain under pressure on adverse global supply conditions, notwithstanding some recent corrections due to the lifting of an export ban by a major supplier. Consequent to the recent reduction in excise duties, domestic retail prices of petroleum products have moderated. International crude oil prices, however, remain elevated, with risks of further pass-through to domestic pump prices.
There are also upside risks from revisions in the prices of electricity. Early results from manufacturing, services, and infrastructure sector firms polled in the Reserve Bank’s surveys expect further input and output price pressures going forward, RBI added.
Taking into these considerations and on the assumption of a normal monsoon in 2022 and an average crude oil price (Indian basket) of $105 per barrel, RBI has projected inflation at 6.7% in 2022-23, with Q1 at 7.5%; Q2 at 7.4%; Q3 at 6.2%; and Q4 at 5.8%, with risks evenly balanced