High inflation may trigger quicker rate hikes

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Sounding a red alert on the CPI inflation at an 8-year high of 7.79 per cent in April, Acuite Ratings has said it may trigger quicker rate hikes.

“If inflation pressures continue to mount there is a likelihood of additional hikes thereby taking the rate to its pre- pandemic level of 5.15 per cent or even higher this year. Additionally, we also expect CRR to be hiked by another 50 bps by September 22,” Acuite Ratings said.

“Given the tone of urgency in RBI’s statement to support the altered inflation-growth dynamics, we now revise our call and expect the RBI to hike repo rate by an additional 60 bps in the rest of this year.”

The increasing price pressures was in motion even before the onslaught of the geopolitical conflicts. However, lingering war between Russia and Ukraine, unprecedented level of sanctions, elevated oil and commodity prices along with prolonged supply chain disruptions have escalated the inflationary concerns both in the global as well as domestic economies, it said.

Globally most economies have shifted from an extended disinflationary phase to tackling strong inflationary concerns, causing key central banks monetary policy rhetoric to switch to extreme hawkishness and policy tightening in 2022 from pandemic-era accommodative policies.

“From domestic standpoint, inflation drivers are likely to face considerable pressure from persistent hardening of input prices. The heightened pressure from commodity prices is also coinciding with unlocking of the economy post Omicron wave while vaccination coverage continues to gain traction. While we stick to our estimate of 5.9 per cent for CPI inflation, we now believe that there is a buildup of upside risks,” Acuite Ratings said.

“Going forward, we expect the core inflation to remain sticky at elevated levels given upward revision of petrol and diesel prices by the OMCs in order to reduce the under-recoveries being accumulated by them at the current crude prices of $ 100 plus per barrel.”

Acuite Ratings said the government, however, may also consider a partial absorption of the increased prices through a further excise duty cut on petrol and diesel which could provide marginal comfort from inflation perspective. While the direct pass-through of elevated commodity prices can be seen through increasing prices of petrol and diesel and non-subsidized LPG, indirect pass through of unprecedented input cost pressures by manufacturers is visible through rising prices of certain personal care products within FMCG sector which will get reflected in the core CPI print in the coming months.

After moderating close to RBI’s inflation target rate in September-21, headline CPI inflation has been rising incessantly. It has started to gather steam from April this year gaining strength from the geo-political crisis and rising to an eight year high of 7.79 per cent  from 6.95 per cent in March. IANS