Inflation Persistence Vs Low Growth, RBI Has Limited Choice

The Research desk of SBI believes that the RBI will maintain a status-quo in August, even as the central bank would still try to find a marriage of convenience of regulatory and developmental measures and monetary policy in August policy.

"The die has been cast, but the RBI can still hold out with a firm message of ratcheting up of inflationary pressures in August policy statement. On a separate note, India must meaningfully vaccinate a large segment of the rural population in Q2 so that it can effectively beat the new mutant strain in the town," SBI has said in a report.

CPI inflation increased to 6.30% on yearly basis in May'21 as compared to 4.23% in Apr'21. This 200 bps increase on yearly terms and 100 bps increase in monthly terms is a matter for concern and even small items are showing disproportionately larger increases, the report said.

"Rising food and commodity prices as well as localised lockdowns have led to sharp increase the headline numbers. Meanwhile, core inflation has also increased to 6.55% and the last time it was seen around this level was in Jun'14. We are now revising our CPI average for FY22 to 6.1% and core inflation is likely to print at 6.4%. interestingly latest core inflation is outside the mean plus 2* (standard deviation) if construct a bell curve using one year's data. Both core WPI and core CPI are positive and highly correlated , And the relentless increase in global commodity prices will only imply that core CPI is unlikely to correct anytime soon," SBI said in its report.

In the coming months, domestic inflation trends are likely to raise anxiety levels in the RBI and the MPC, the report noted. Driven

Diven by several global and domestic factors, inflation may remain elevated in the coming months. Specifically, the faster than anticipated and robust recovery in some of the advanced countries is likely to exert upward pressure on international commodity prices, including oil. The latter being an intermediate good in leading EMEs, it would generate cost push inflation," SBI Research said in its report.