Even as the latest inflation data for September shows it rising to the five-month-high level, experts said the RBI’s Monetary Policy Committee (MPC) is expected to continue with its rate hikes and may raise up to 60 basis points (bps) in December 2022. They, however, said the October inflation numbers next month will clear the picture on the quantum of the possible rate hike.
India’s retail inflation accelerated to a five-month-high level of 7.41 per cent in September, compared with 7 per cent in the previous month, amid a surge in food prices. Food inflation rose to 8.60 per cent in September this year, against 7.62 per cent in August.
It is the ninth month that the Consumer Price Index (CPI)-based inflation has remained above the RBI’s upper tolerance limit of 6 per cent, and has risen despite the central bank’s efforts to curb it. The retail inflation had stood at 7.04 per cent in May, 7.01 per cent in June, 6.71 per cent in July, 7 per cent in August and now 7.41 per cent in September.
Sunil Sinha, principal economist of India Ratings and Research, said, “Given the rise in wheat prices lately and below-par paddy sowing in the gangetic plain, India Ratings and Research believes cereal prices are unlikely to decline in the near term. This simply means cereal inflation will continue to exert pressure on retail inflation in addition to the sustained services sector and imported inflation.”
Sinha added that Ind-Ra expects the RBI to raise policy rates by up to 50-60 basis points in the current rate hike cycle to keep the terminal rate of interest in the range of 6.25-6.50 per cent. “Since the impact of monetary policy is felt with a lag of 9-12 months, future rate hikes will be data-dependent.”
The RBI’s rate-setting panel has hiked 140 basis points in four policy reviews since May 2022. A basis point is equal to a 100th of a percentage.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said, “The Consumer Price Index (CPI)-based inflation in September at 7.41 per cent was in line with our expectations at 7.35 per cent. Food items continue to see an upside in price momentum especially in cereals and vegetables. Lower acreage and unseasonal rains will continue to impart upside to food prices.”
Rakshit added that the September inflation print should keep the RBI on course for a 35-bps hike in December, with inflation remaining above 6 per cent at least till February 2023 and reducing gradually towards the 4.5-5.5 per cent range in FY2024.
Stating that the RBI has a major challenge ahead on inflation, V K Vijayakumar, chief investment strategist at Geojit Financial Services, said, “The MPC will have to continue raising rates most likely by 50 bp in the next meeting and this will adversely impact economic growth which is already showing signs of deceleration. The contraction of industrial output by 0.8 per cent in August is an indication of a slowing economy. The slowing global economy is another major headwind for growth.”
Aditi Nayar, chief economist at ICRA, said that another rate hike is certain in the December 2022 MPC review, after the uncomfortable inflation print of 7.4 per cent for September 2022.
“The quantum of the next rate hike will be determined by how much the inflation print recedes in October 2022, as well as the strength of the GDP growth for Q2 FY2023,” Nayar added.
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