Inflation Risks Persist But, Peak Seems Nearby

With retail inflation hitting an eight-year high of 7.8% in Apr'22, broad-based inflationary pressures and several upside risks to inflation, aggressive monetary tightening seems to be on cards, Anand Rathi has said in a report.

"We expect a 50-65 basis points rate hike in the next three months and a 200bp rate hike in the next 24 months. These would unfavourably impact equities and other financial markets. Despite these, with the recent softening of global commodity prices, improvements in supply chains, a favourable monsoon outlook and lack of demand pressures, we expect inflation to peak soon and gradual rate hikes to follow the initial sharp increases," the firm has said.

In Apr'22, India's retail inflation at 7.8% was the highest since Jun'14 and marked the seventh successive rise. "The inflation rate was way above our and consensus expectation," the brokerage has said.

Broad-based inflation

Food inflation in Apr'22 rose to 8.4% from 7.7% the previous month. Core inflation at 7% in Apr'22 was the highest in eight years. Fuel inflation jumped to 10.8%, from 7.5% the previous month.

Many, mostly supply-side, headwinds. Several factors are pushing up overall inflation. While the food index just crossed the Nov'21 level in Apr'22, the unfavourable y/y base led to 18-month high inflation. A spike in global crude-oil prices and a weaker rupee reversed the modest dampening of fuel inflation of the previous month. The pass-through of higher commodity prices and inclusion of transportation (which includes diesel and petrol) took core inflation to an eight-year high. All these are mainly cost-push factors. In contrast, relatively soft services (vs. commodity and manufactured product) inflation seem to suggest lack of demand-pull inflation.

Inflation risks persist but the peak seems nearby

Geo-political and weather-related upside risks to near-term inflation continue as also the unfavourable base effect for food. Yet, the recent modest softening of global commodity prices, easing of some global supply-chain problems, a favourable monsoon outlook and the absence of demand pressures seem to indicate retail inflation is close to its peak.

RBI may hike repo rates again in June

"Despite the alarming recent rise, retail inflation in India is at an eight-year high vs 20 year+ highs in most European and North American countries. After an indirect 40bp hike in the last policy, the RBI has raised the repo rate by 40bps at an unscheduled MPC meeting. With medium-term inflation at 4.5-5.5% and the RBI's preference for a real policy rate of 1-1.5%, we expect the repo rate at 6-6.5% in the next 24 months. In the next three months, another 50-65bp rate hike seems on the cards," the brokerage has added.