UBS Securities India sees India’s inflation rising in the March 2022 quarter, and may even be higher than the RBI’s upper bound comfort level of 6 per cent, said Tanvee Gupta Jain, Chief India Economist, on Wednesday.

Not a structural issue

Asserting that sticky elevated inflation in India is not a structural issue, Jain noted that CPI inflation, which is expected to average closer to 5 per cent in the December 2021 quarter, is more a supply side-driven problem. “I was never in the camp that held inflation in India is a structural problem,” she said while discussing a recent UBS Securities report on Indian economy.

Policymakers in India are now mostly guided by the movements in Consumer Price Index-based inflation.

In fact, a UBS Securities India analysis of the inflation data indicated that most of the increase in headline CPI inflation since the pandemic has been largely due to supply-side bottlenecks and rising global commodity prices, while the role of services and others has been largely muted.

Monetary policy

For the full year, UBS Securities India expects CPI inflation at 5.4 per cent in 2021-22 and close lower at 4.8 per cent in 2022-23. This is provided the Monetary Policy Committee (MPC) gradually starts unwinding its ultra-easy policy setting as the economic recovery gains momentum.

On monetary policy normalisation, UBS Securities India sees the policy normalisation sequencing to be gradual.

“We are expecting RBI’s liquidity calibration efforts to continue in December 2021 quarter – equivalent to 60 basis point policy rate hike. The second aspect of shift in monetary policy stance to neutral accompanied by a hike in reverse repo is expected from March 2022 quarter. We are expecting a increase in repo in second half of 2022-2023,” she added.

Economic recovery

Jain said that the Indian economy is bouncing back on progressive reopening of the economy. She highlighted that the recovery from second wave has been more pronounced “than what we had anticipated initially”.

UBS India activity indicator improved 16.8per cent sequentially on a quarter-on-quarter basis in the September quarter after contracting 11 per cent in June quarter, she added.

UBS Securities India sees Indian economy growing at 9.5 per cent this fiscal. “We see growth momentum improve in second half of this fiscal on pent up demand and cyclical tailwinds, favourable export demand and higher govt spending on capex,” she added.

On the biggest growth drivers, UBS Securities India said that the biggest growth driver now is ‘consumption rebound’, and “we expect it to benefit from unwinding of precautionary savings during pandemic”.

India real GDP is expected to remain well above the trend at 7.7 per cent in 2022-23 and settle at long-term average of 6 per cent in 2023-24.

“India should remain as one of the fastest growing emerging market countries in FY23,” she said.

She also said that UBS expects export growth momentum to moderate as there will be a shift from goods to services at global level.

Fed rate hike

On the issue of expected timeline for first rate hike by the US Fed, she said that the UBS view is that the first rate hike is likely to happen only in the later part of 2023.

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