Brace For June Interest Rate Hike

Emkay Global believes that with inflation likely to exceed 6% for three consecutive quarters, especially if energy prices remain elevated, the RBI is likely to get quite perturbed.

"We are currently tracking Apr'22 inflation at 7.2%. With higher food price pressure in the near term (summer effect, international prices, higher transport cost, supply chains) and persistent input cost pressure in the non-food segment, we now see inflation crossing 6% in FY23. The Mar'22 print strengthens rate hike expectations in Jun'22. We maintain that FY23 could see a rate hike of up to 100bps. The terminal rate may go a tad higher from 5.25%, with the RBI now showing its intent to keep real rates neutral," the brokerage has said.

CPI inflation shy of 7%, food inflation hurt by costlier supply chain

CPI inflation surged to 6.95% in Mar'22, surpassing expectations (Emkay: 6.5%, Consensus: 6.4%). Inflation has crossed the RBI's upper tolerance limit of 6% for the third straight month, with Q4FY22 and FY22 averaging 6.34% and 5.5%, respectively. Food inflation (7.68% yoy; 1.4% mom) largely drove the spike (rural food inflation topping 8%), with higher prices of edible oils and supply-chain dependent perishable items (meat, fish, fruits and milk). Prices of these items may also stay high going ahead.

"However, pulses, sugar and vegetables were sequentially lower. Mandi prices show stable vegetable prices next month even as other perishables may remain high. Summer months will see a seasonal rise in food prices, while higher transportation costs may further add to the woes. Energy inflation at 7.5% (0.9% mom) seems to show an incomplete pass-through of oil pain," Emkay Global has said.

Core inflation surges to 6.6% and is likely to shoot up further

Core inflation (ex food, fuel and intoxicants) inched up further to 6.59% (0.6% MoM) from 6.05% prior, reflecting the impact of the pass-through of input costs and higher transportation costs.

"The personal care & effects category contributed the most (gold and silver up 4% and 6% each), while the T&C increase was modest and has yet to fully reflect the surge in prices of motor fuel and kerosene in Apr'22 and the increase in prices of private transport services in urban areas (Uber, etc. raising prices). Housing prices weakened mildly sequentially. Overall, core inflation momentum will remain healthy, as firms may continue to partially pass on persisting higher input costs (as seen in recent PMIs and some commentary from FMCG companies, healthcare), implying that the average print will hover around 6% through Q1FY23," the brokerage has said.