scorecardresearchInflation eases in June; can it slow the pace of interest rate hikes? Here's what experts say

Inflation eases in June; can it slow the pace of interest rate hikes? Here's what experts say

Updated: 13 Jul 2022, 03:06 PM IST
TL;DR.
  • Market participants have begun to wonder if the central bank would slow the pace of rate hikes, considering the fact that the RBI has been the most aggressive in raising rates among major Asian emerging market economies.
The central bank has been saying that it will ensure that the rate hikes do not derail the economic recovery.

The central bank has been saying that it will ensure that the rate hikes do not derail the economic recovery.

Even as it remained above the RBI's tolerance level, India's retail inflation eased slightly to 7.01% in June against 7.04% in May.

As Mint reported earlier, the consumer price-based inflation (CPI) has breached the upper limit of RBI's tolerance band, ranging from 2-6%, for the sixth consecutive month and has remained above 7% for the third consecutive month.

Yet, what is comforting is that the CPI inflation in June was in line with expectations. Market participants have begun to wonder if the central bank would slow the pace of rate hikes, considering the fact that the RBI has been the most aggressive in raising rates among major Asian emerging market economies.

A cumulative hike of 130 basis points (bps) in effective policy rate--i.e. the standing deposit facility rate and the repo rate hike of 90bps--by the RBI in the past three months is among the highest and the fastest, showed an analysis done by Motilal Oswal, earlier reported by Mint. One basis point is 0.01%.

Meanwhile, the central bank has been saying that it will ensure that the rate hikes do not derail the economic recovery.

A Bloomberg report quoted RBI Governor Shaktikanta Das saying: “We always factor in growth requirement for the economy and the growth sacrifice should be within the manageable limit. The policy should not lead to a situation where the economy faces a massive slowdown.”

Rate hikes to continue

Analysts and brokerage firms believe the inflation peaked in April and the gradual decline in commodity prices will ease inflationary pressure further. However, this should not mean that the RBI will pause the rate hikes because inflation still is much above the RBI's tolerance band.

Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities is of the view that the June inflation print should keep the RBI on course with the rate hikes without new causes for concern.

"Inflation should gradually decline in the second half of FY23. We continue to pencil in a repo rate hike of 35 bps in the August policy and RBI should stay on course to reach 5.75% by end of 2022,” said Rakshit.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank pointed out that the CPI inflation broadly remained steady at around 7% bringing the 1QFY23 average to 7.3% — marginally lower than RBI’s projections of 7.5%.

Nonetheless, inflation is expected to remain elevated with only a gradual descent through the rest of the year.

"While the softening global commodity prices provide some relief, the gains will be limited due to the weakening rupee. We expect the MPC to continue to frontload policy rate hikes especially as global monetary tightening continues. We expect 85-110bps of additional rate hikes in the coming few meetings to bring the repo rate towards 5.75-6% by end of FY23,” said Bhardwaj.

Rating agency India Ratings and Research (Ind-Ra) expects July 2022 inflation to be 20-30bp higher than 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 RBI to pursue monetary tightening and it expects RBI to hike the policy rate by 25-35bp in the August 2022 monetary policy review.

Brokerage firm Emkay Global expects July inflation to be in the range of 6.7-6.8%, with the Q2FY23E print may come at 7-7.1% - lower than the RBI’s forecast of 7.4% which could mark a downward surprise for the central bank.

This is, however, unlikely to derail the RBI’s front-loaded tightening path amid still-elevated inflation, Emkay said.

"We maintain our FY23 CPI inflation estimate at 6.5% with a mild downward bias. FY23 could see rates go up by 75bps+, with the RBI now showing its intent to keep real rates neutral or higher," Emkay said.

"However, the front-loaded rate hike cycle does not imply a lengthy tightening cycle, and once they reach the supposed neutral pre-Covid monetary conditions, the bar for further tightening may go higher incrementally amid increasing growth and inflation trade-offs," the brokerage firm added.

Disclaimer: The views and recommendations made above are those of individual analysts or broking firms and not of MintGenie.

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First Published: 13 Jul 2022, 03:06 PM IST