Rate Hike Imminent As Inflation Continues To Be Above RBI's Upper Band Of Tolerance

CPI Inflation basis which India's central bank decides on the monetary decision stance has gallopped to 6.95% levels in March. This is way higher than RBI's upper tolerance target of 6%. This time it is precisely on rising food article prices.

Nevertheless, given the global and domestic headwinds on account of inflation, Emkay Global in its report on CPI inflation said, "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", added the report.

"The Mar'22 inflation print exceeded the RBI's target range materially, and the next two quarters are also likely to exceed 6%, which could pressure the RBI to act sooner than later. We are tracking Apr'22 inflation at 7.2%, albeit peaking, assuming pump prices stabilize ahead. With food prices looking high 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 RBI reckoned that inflation has again taken precedence over growth in its reaction function. With inflation realities worsening, June hike is likely", noted the report.

Chief Economist at Motilal Oswal Financial Services Ltd. Is of the view thathigher inflation and lower growth will lead to difficult policy choices. In a shocker, headline CPI inflation came in at 17-month high of 7% YoY in Mar'22, much higher than the market/our forecast of 6.4%/6.5%.

Going forward, inflation may stay at 7% in April, before easing towards 6.2% in May/Jun'22. Weak growth, however, will make it difficult for the RBI to be aggressive in rate hikes. As stated earlier, repo rate hike is imminent. Although Jun'22 is a close call, it is almost certain in Aug'22.