The Reserve Bank of India is in a pickle, as inflation has risen above the mandated band and growth has slowed, a British brokerage said on Tuesday. The central bank may raise the repo rate only in the first quarter of the next fiscal year (April-June 2022) and maintain an accommodative stance in the interim, according to a note from Barclays’ chief India economist Rahul Bajoria.
It is worth noting that, after initially responding with steep rate cuts, the RBI has resorted to unconventional tools to aid the economy’s growth process. However, with recent increases in inflation – the headline figure was 6.3 percent in May – there have been concerns about the central bank’s tolerance.
The RBI is in a pickle as growth prospects deteriorate and inflation accelerates. Given this backdrop, we expect the central bank to maintain its accommodative stance and to continue to rely on supply-side measures from the government to rein in price pressures, while reiterating its commitment to anchoring medium-term inflation expectations, Bajoria said.
The beginning of policy normalisation will remain contingent on a sustained recovery in growth, which is unlikely to materialise before the end of the current fiscal year, he added.
The ineffectiveness of the government’s supply-side measures, the unmooring of inflation expectations, the emergence of a wage-price spiral, and the reintroduction of pricing power are among the key triggers that could force the RBI to act sooner than expected, he said.
The brokerage anticipates inflation to be 5.4 percent in FY22, up from 5.4 percent in the previous fiscal year, and attributes the current surge in price increases to global commodity prices. India’s inflation is being driven by external factors, limiting policy options and squeezing profit margins, Bajoria explained, adding that even if these pressures abate, margin normalisation may continue to keep CPI (Consumer Price Index) inflation elevated and sticky in the future.
Commodity price increases are having a direct impact on key CPI sub-components, the brokerage said, noting that the increase in food prices over the last two to three quarters has been driven by non-perishables, primarily pulses and vegetable oils, which are heavily influenced by global prices.
(Only the headline, some content and picture of this report may have been reworked by the Mixpoint Team; the rest of the content is auto-generated from a syndicated feed.)