Despite the fact that retail inflation rose to 6.01% in January and is expected to continue high through April, foreign trading research predicts that the RBI will keep major policy rates steady during the first half of 2022. According to Swiss firm UBS Securities India, the policy would shift only in the second half, when the Monetary Policy Committee (MPC) may provide a 50 basis point boost beginning with the August policy.
Retail inflation surged to a seven-month high of 6.01 percent in January, according to government statistics published on Monday, but it was lower than the last peak of 6.26 percent in June 2021.
At 12.96%, wholesale inflation remained in the double digits. The administration also increased the December 2021 CPI inflation rate to 5.66% from 5.59%.
According to Reserve Bank Governor Shaktikanta Das, the spike in inflation was mostly due to quantitative reasons, particularly in the q3 of FY22, and the same base impact will play out in different ways in the future months.
Das stated that the RBI has already anticipated high inflation rates in its recent bi-monthly fiscal policy, and retail inflation in January exceeding 6% “should not surprise or create any alarm.” The RBI anticipates retail inflation to fall to 4.5 percent next fiscal year, while expecting it to be 5.3 percent in 2021-22, and based on this, it has kept all key rates constant and maintained its dovish stance.
According to Tanvee Gupta-Jain, chief analyst at UBS Securities India, the new figures are in line with expectations, and the increase was mostly driven by an unfavourable base impact and persistent supply-side limitations. Core inflation was stable at 6%, down from 6.1% the previous month, suggesting the slow pass-through of rising input costs to consumers.
She also stated that pricing pressure is stronger in rural regions (6.1% vs. 5.9% in metropolitan areas). She forecasts retail inflation to stay high in the 5.5-6% bracket through April, owing to the enormous rise in prices, particularly oil, supply-side disruptions, and growing material cost challenges, all of which will drive inflation higher in the future months.
Even if CPI will remain high until April 2022, before falling to 5% in the Q3 as the price of oil start to decline due to increasing supplies, she anticipates the MPC to keep the repo rate the same until the first half of FY23, before delivering the first hike in the August policy and a cumulative increase of 50 basis points in the second half.