Consumer Price Index (CPI) inflation in April accelerated to 7.Eight per cent, the very best stage in eight years, and better than analyst expectations, pushed by larger costs of important meals objects (equivalent to cereals, fruits, and milk) and motor and cooking gas. Analysts mentioned this means the spectre of a generalisation of inflationary pressures which has seeped into on a regular basis wants, including that inflation is anticipated to stay above RBI’s higher restrict threshold of 6 per cent for essentially the most a part of this 12 months. Experts count on the most recent studying to place strain on the Reserve Bank of India to additional elevate charges as a lot as 50 foundation factors (bps) within the upcoming June financial coverage (MPC) assembly.
‘Inflation may remain above RBI’s goal band for 3 quarters marking first official ‘failure’ of financial framework’: Rahul Bajoria, Chief India Economist, Barclays.
“Rising price pressures remain a cause of concern, and are likely to reduce the space available for policy support. Our calculations suggest that inflation could remain above the RBI’s target band for three consecutive quarters (Q1-Q3 2022), marking the first official ‘failure’ of the monetary framework. Today’s upside surprise in inflation also sets up the RBI to undertake another inflation forecast revision, a factor which could have prompted the MPC’s inter meeting rate hike undertaken in early May,” Rahul Bajoria, Chief India Economist, Barclays mentioned.
“We expect the RBI to follow up with at least one 50 bps rate hike starting with the June policy meeting, and then slow the cycle in August to 25 bps hike. We see the RBI raising policy rates to 5.15% by August, and expect it to reassess macroeconomic momentum to gauge the need for further hikes beyond that,” Bajoria added.
‘Triple whammy of commodity-price shocks, supply-chain shocks and resilient growth’: Madhavi Arora, Lead Economist, Emkay Global Financial Services
“The inflation shocker in May attributes to broad-based segmented gains in food, energy and core,” Madhavi Arora, Lead Economist, Emkay Global Financial Services mentioned. “Overall rising price pressures remain a cause of concern, and are likely to pressure MPC further. The triple whammy of commodity-price shocks, supply-chain shocks and resilient growth, has shifted the reaction function in favour of inflation containment. The RBI no longer thinks the output sacrifice required to tame somewhat supply-driven inflation can be so high on net. The RBI’s reaction function is now evolving with fluid macro realities.”
“We see June’s policy to be super-live, and the MPC may front-load rates by another 25bps-40bps. The terminal rate may be around or a tad higher than 5.50 per cent, with the RBI now showing its intent to keep real rates neutral or above,” Arora mentioned.
‘Do not expect inflation to go below 6 per cent this year’: Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
“April headline inflation print is likely to be the peak for the year. However, we do not expect inflation to go below 6 per cent for the rest of the year with prints over next few months remaining around 7-7.5 per cent. Over the next few months we should be focusing on movement in edible oils, crude prices and fuel price hikes, kharif MSP announcement, and pass-through of input prices by the companies to glean on the inflation trajectory,” Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities mentioned. “On the financial coverage entrance, we count on the RBI to hike repo price by 35-40 bps together with 50 bps hike in CRR. In CY2022, from hereon, we count on repo price hikes of 90-110 bps together with 50 bps of CRR hike. The RBI would intention to cut back liquidity together with reverting to above 5.15 per cent stage of repo price as quickly as potential,” Rakshit added.
‘95-month high CPI inflation justified RBI’s off cycle price hike’ : Aditi Nayar, Chief Economist, ICRA Limited
“The surge in the CPI inflation has clearly justified the off cycle rate hike last week, and significantly raised the likelihood of a back-to-back rate increase in June 2022. We see a higher base softening the May 2022 CPI inflation print, although it will remain above 6.5 per cent,” Aditi Nayar, Chief Economist, ICRA Limited mentioned. “We now foresee a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies to 5.15 per cent, followed by a pause to assess the impact of growth. As of now, we continue to see the terminal rate at 5.5 per cent by the middle of 2023,” Nayar added.
“The sequential rise in the retail prices of several food items in the early part of May 2022 is likely to keep the food inflation elevated in the month, although a high base may soften the YoY inflation reading from April 2022 highs,” Nayar mentioned.