RBI may be forced to raise rates faster than anticipated

It has been reported that The Reserve Bank of India may be forced to raise interest rates at a faster pace than anticipated earlier as it would be forced to catch up with accelerating price pressures. The central bank may have to raise rates by as much as 100 basis points, up from 75 bps earlier as price rise spreads to services and consumer goods companies see 15 to 21 percent jump in their input costs.

CPI inflation rose to 4.9% y-o-y in November from 4.5% in October, below expectations (5.1%), with a downside surprise in food and fuel price inflation, but core inflation rose further to 6.1% from 5.9%, signalling rising underlying price pressures. The cut in excise duties on fuel was offset by higher price increases in personal care, clothing, recreation and households goods and services in the CPI basket, suggesting pressures due to rising input cost pass-through and reopening.

” Over the past few quarters, inflation across raw material categories has been unprecedented, with prices of some at a 40-year high,” said Edelweiss Research. ” Most companies too have taken sharpest price hikes in many years”, the company said.

RBI’s Monetary Policy Committee has maintained its CPI inflation estimate at 5.3% for FY22 in its December meeting but has increased the estimate for Q3 from 4.5% to 5.1% and reduced the Q4 inflation from 5.8% to 5.7%.

Nomura expects inflation to rise further to ~5.5% y-o-y in December, and subsequently converge towards core inflation, at a shade above 6% in Q1 2022. It expects inflation which has risen due to both technical and fundamental factors to average 5.6% in 2022 from 5.2% in 2021. ” We now expect the RBI to hike the repo rate by 100bp cumulatively in 2022, up from our previous forecast of 75bp, due to higher inflation risks” said Sonal Varma, chief economist, India, Asia (excluding Japan).

Currently, the repo rate- the rate at which it lends to banks at 4 percent and reverse repo the rate at which it borrows from banks at 3.35 percent remains unchanged since May 2020 as RBI has focussed on growth instead of inflation, the company said.

The impact of policy rate reduction is evident in lower interest costs as indicated in RBI’s study of the performance of the corporate sector. But these gains could be eroded due to higher input prices.

Although there would be some deflationary impact from a catch up in winter food supplies along with the recent correction in global commodity prices, hike in telecom tariffs and upward adjustment in GST rate for select items of clothing & footwear would add upside pressure, according to research firm QuantEco Research.

Even the recent wholesale price inflation numbers which touched an all time high of 14.2 percent in November point to rising pressure on input cost”Acuité expects a further pass through of input costs in manufactured goods as demand continues to improve” said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research. ” We expect continuing supply side bottlenecks, raw material shortages and high commodity prices to maintain the core inflation at such high levels.” (Economic Times)