RBI in its July Bulletin says easing of inflation could be even sooner and faster, and key is the direction of change in inflation – not its level
Though inflation is showing a slight downwards trend and the Reserve Bank of India (RBI) has said “there are indications that inflation may be peaking”, experts are of the opinion that the Monetary Policy Committee (MPC) is still expected to go for a rate hike but the latest data may limit the aggressive hikes.
The RBI in its July 2022 Bulletin has said the easing of inflation could be even sooner and faster and the key is the direction of change in inflation – not its level – in these extraordinary times. “Against this backdrop, it is our hope that required monetary policy actions in India will be more moderate than elsewhere in the world and that we will be able to bring inflation back to target within a two-year time span.”
The retail inflation in India stood at 7.01 per cent during June, the sixth consecutive month when the inflation remains above the RBI’s tolerance limit of six per cent. However, this is the second consecutive month that has seen a slight easing in inflation as compared to the previous month. The inflation in April had stood at 7.79 per cent, which fell to 7.04 per cent in May and now to 7.01 per cent in June.
Kotak Institutional Equities Senior Economist Suvodeep Rakshit said the current inflation rate should keep the RBI on course with the rate hikes without new causes for concern. “We continue to pencil in the repo rate hike of 35 bps in the August policy and the RBI should stay on course to reach 5.75 per cent by end of CY2022.”
A market expert, who din’t want to be named, however, said, “The RBI will go for a rate hike in its August policy review but it will be softer on the rate hikes now as inflation is showing slight easing.”
In the international market also, prices of various commodities and crude oil are cooling off on fears of a recession. Crude oil, which had touched around $130 per barrel just after the Ukraine-Russia war, has now fallen to $106.92 per barrel. Edible oil prices have also declined with companies like Adani Wilmar slashing as much as Rs 30 per litre.
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Sharad Chandra Shukla, director of Mehta Equities, said that given the inflationary expectations, the MPC is likely to go for a rate hike in August by a minimum of 50 basis points, if not 75 bps.
Vivek Goel, co-founder and joint managing director of Tailwind Financial Service, said, “Despite that (easing of inflation), with inflation continuing to remain above the RBI’s target of 2-6 per cent for the 6th consecutive month, the MPC remained wary of risks in upcoming policy meetings.”
He added that there has been a decline in commodity prices globally, on the back of recessionary concerns amid COVID-19-led lockdowns in China and aggressive policy tightening by the US Fed. “While this might provide some relief from inflation, strengthening US dollar is weighing on the rupee and would keep the MPC to maintain the need for frontloaded policy action and accordingly continue with rate hikes of 75-90 bps in the next three meets till December.”
The MPC is scheduled to meet for the bi-monthly monetary policy review during August 2-4. In its last policy review in June, the rate-setting panel raised the key repo rate by 50 basis points to control inflation. This followed a 40-basis-point hike in repo rate in an off-cycle monetary policy review in May.
