Inflation Cooling Off: Will RBI Still Hike Interest Rates in August? Know In Details

Even as inflation in India is showing a downward trend with the latest June data coming in slightly lower than the previous month, analysts feel the Reserve Bank of India (RBI) is expected to continue with monetary tightening and go for a rate hike next month as the inflation rate still remains above its target band of 6 per cent. Retail inflation in June stood at 7.01 per cent, the sixth consecutive month when inflation remained above the RBI’s target limit.

The core inflation, which excludes food and fuel segments, in June stood at 6 per cent. The food inflation was 7.75 per cent in June, compared with 7.97 per cent in the previous month. As per the latest data from the National Statistical Office (NSO), the inflation print in vegetables eased to 17.37 per cent during the month from 18.26 per cent in May; while for ‘pulses and products’, it slowed to (-)1.02 per cent against (-)0.42 per cent.

The inflation in April had stood at 7.79 per cent, which fell to 7.04 per cent in May and now to 7.01 per cent in June.

Sunil Kumar Sinha, principal economist at India Ratings and Research, said, “As the commodity prices have come off from their recent peaks lately, it will have some cooling impact on inflation, but the weakness in rupee may wipe out some these gains. Base effect will also turn unfavourable from July 2022.”

He added that Ind-Ra expects the July 2022 inflation to be 20-30 basis points (bps) higher than the June 2022 inflation. Weak economic activities in the developed world will have some impact on commodity prices. However, the currency movement is key. “Ind-Ra expects the RBI to pursue monetary tightening and it expects the RBI to hike policy rate by 25-35 bps in August 2022 monetary policy review.”

The retail inflation in the past few months saw a spike, on supply chain disruptions due to the Russia-Ukraine war and on higher crude oil prices. After the war started in February-end, the brent crude oil price reached as high as near $130 per barrel. however, now, the crude oil prices have come down and even fell below $100 a barrel for the first time in three months on a strengthening dollar, COVID-19 curbs in top crude importer China, and rising fears of a global economic slowdown. Edible oil prices in India have also fallen recently.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said, “CPI inflation in June was in line with expectations at 7 per cnet. We have been expecting inflation to remain around the 7 per cent handle for the rest of 1HFY23… We continue to pencil in the repo rate hike of 35 bps in the August policy and the RBI should stay on course to reach 5.75 per cent by the end of CY2022.”

The RBI’s six-member Monetary Policy Committee, which decides on the interest rates in the country, is scheduled to meet during August 2-4 for a bi-monthly monetary policy review. The panel takes the retail inflation numbers as a reference to decide on the interest rates.

In the previous policy meeting last month, it raised the key repo rate by 50 basis points to control inflation. In an off-cycle policy review in May also, the MPC raised the repo rate by 40 basis points.

Knight Frank India Director (Research) Vivek Rathi said various central government measures in the past two months, such as reduction in petrol and diesel excise duties, cut in import duty on edible oils and curtailment measures on food exports, helped contain inflation in June as seen in softened sequential price growth. The near-term consumer inflation outlook remains a little uncertain.”

He added that to bring inflation under control and at the same time to harbour growth, he expects the RBI to conclude its August 2022 policy meeting with a moderate 25-35 bps repo rate hike.

Meanwhile, the industrial production for May released on Tuesday showed a broad-based sequential improvement indicating a resilient economic growth so far, unlike in the other major economies where the growth is faltering.

Madhavi Arora, lead economist at Emkay Global Financial Services, said, “We maintain our FY23 CPI inflation estimate at 6.5 per cent with a mild downward bias (RBI: 6.7 per cent). FY23 could see rates go up by 75bps+, with the RBI now showing its intent to keep real rates neutral or higher to quickly reach pre-Covid levels. Our Taylor’s estimate shows a maximum tightening of the policy rate by 6 per cent by FY23, of which liquidity tightening to 2 per cent of NDTL (net demand time liabilities) is tantamount to another estimated 25 bps effective rate hike.”

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