The Reserve Bank of India (RBI) will be obliged to bring forward its rate increases as headline inflation is already slightly above its target range even as oil prices are expected to be higher in H1 (January-June) of Calendar Year (CY) 2022, according to a report by ICICI Securities.
“With CPI (consumer price index) inflation likely staying above its target in Apr-May 2022, we expect 50 basis points (bps) of rate hikes from the Reserve Bank of India (RBI) in April-July 2022 rather than in August-December 2022,” said Prasenjit K. Basu, Chief Economist.
Given the cascading effect of higher fuel prices, India’s headline CPI inflation rate will likely remain above 6 per cent year-on-year (YoY) in March-April 2022, edge slightly below 6 per cent YoY in May-June 2022 (because of the high base from a year ago), and continue edging lower in subsequent months as Brent crude prices begin declining with the enhanced supply from US shale, Iran and (reluctantly) the rest of OPEC, per Basu’s assessment.
Since Russia is a major producer and exporter of many other commodities – wheat and fertilizer (largest exporter), nickel and palladium (largest producer), coal, steel and aluminium (third-largest exporter), there will be a generalised rise in global commodity prices,the report said.
Headline inflation
Referring to the headline inflation being slightly above the monetary policy committee’s target range (and likely to remain above it in March-April 2022), Basu believes that the RBI will be obliged to bring forward its rate increases.
With fuel prices moderating sharply in the latter period, and the earlier rate hikes reining in domestic demand, CPI inflation will stabilise in the 4-5 per cent YoY range in August-December 2022, obviating the need for further increases in the repo rate, he added.
Basu observed that India had no extraordinary monetary accommodation during the pandemic: India’s M3 (broad money) growth of 11.3 per cent YoY in March 2020-January 2022 was much lower than the 28-year pre-pandemic average M3 growth of 15.4 per cent YoY. So there is little need for a roll-back of broad-money growth in India.
The I-Sec report observed that Brent crude prices are uncorrelated with headline CPI inflation in India (because fuel & light have only a 6.84 per cent weightage in the CPI), but a generalised surge in commodity prices will likely keep India’s CPI inflation above 6 per cent YoY in March-April 2022, nudging the RBI to raise the repo rate by 50 bps in April-July 2022.
The report emphasised that as an alternate supplier of steel, aluminium and foodgrain, India’s exports stand to gain from the disruptions to Russian supply.