Inflation will remain elevated this year and the next, ADB said in an update to its flagship Asian Development Outlook (ADO) 2022 report
”This Update forecasts the inflation rate averaging 6.7 percent in FY2022 (fiscal ending in March 2023) before moderating to 5.8 percent in FY2023 (ending in March 2024), just below the central bank target range of 2 – 6 percent,” it said
Mumbai:
The Reserve Bank of India (RBI) may take cues from its global counterparts, including the US Federal Reserve, to raise interest rate for the fourth time in a row on Friday to tame stubborn inflation.
The RBI, which has since May raised the short-term lending rate (repo) by 140 basis points (bps), may again go for a 50-bps increase to take it to a three-year high of 5.9 per cent, say experts. The central bank had raised the repo rate by 40 bps in May and 50 bps each in June and August.
The present rate is 5.4 per cent. The consumer price index (CPI) based retail inflation, which had started showing signs of moderation since May, has again firmed up to 7 per cent in August.
The RBI takes into account retail inflation while framing its bi-monthly monetary policy.
The RBI Governor-headed Monetary Policy Committee (MPC) is scheduled to start its three-day deliberations on Wednesday. The decision of the rate-setting panel would be announced on Friday (September 30). The US Fed delivered third consecutive rate hike after it raised the rates by 75 bps to take the target range to 3 – 3.25 per cent.
The central banks of the UK and the EU have also gone for rate hikes to tame inflation. Madan Sabnavis, Chief Economist at Bank of Baroda, said inflation in India remains high at around 7 per cent and is unlikely to come down any time soon.
”This means that a rate hike is given. The quantum is what the market would be interested in. While a hike of 25-35 bps would have signaled that the RBI is confident that the worst of inflation is over, the recent developments in the forex market could prompt a higher quantum of 50 bps to stay on track with other markets so as to retain investor interest,” he said.
The government has tasked the RBI to ensure the retail inflation remains at 4 per cent, with a margin of 2 per cent on either side. Dhruv Agarwala, Group CEO, Housing.com, said reining in inflation will remain the RBI’s top concern amid resilient economic expansion and robust credit growth.
”Any hike in rates would result in banks increasing home loan interest rates, too. But, we are of the opinion that its impact would not be significant as demand for property remains robust. Demand is only going to accelerate further during this festive season,” he said.
Global commodity prices have remained volatile after their fall from historical highs in June. SBI in a special report said a 50 basis points hike in repo rate ”looks imminent”.
”We expect the peak repo rate in the cycle at 6.25 per cent. A final rate hike of 35 bps is expected in December policy,” it said. Aditi Nayar, Chief Economist, ICRA, too expects another ‘new normal’ 50 bps rate hike from the MPC in September 2022. With inflation expected to soften in October 2022, the December policy decision is likely to be highly data dependent, she added.
Eco activity still below pre-pandemic level; RBI to slow down on rate cuts till next year: ADB
With economic activity still to reach pre-pandemic levels, the RBI may slow down the pace of rate hikes until next year to quell soaring inflation while supporting growth, the Asian Development Bank (ADB) says in its latest report.
The Manila-based multilateral funding agency has raised the inflation forecast for the current fiscal year ending in March 2023 to 6.7 percent from its earlier projection of 5.8 percent. For the next fiscal year too, the forecast has been revised upwards to 5.8 percent from 5 percent earlier.
Inflation will remain elevated this year and the next, ADB said in an update to its flagship Asian Development Outlook (ADO) 2022 report.
”This Update forecasts the inflation rate averaging 6.7 percent in FY2022 (fiscal ending in March 2023) before moderating to 5.8 percent in FY2023 (ending in March 2024), just below the central bank target range of 2 – 6 percent,” it said.
Both forecasts are higher than ADO 2022’s projections. Even though supply pressures are expected to ease in the current fiscal year, upward inflation pressure could continue because of demand-side pressures caused by increasing economic activity, according to the ADB report.
The report says the Reserve Bank of India (RBI) is expected to increase policy rates even though economic activity is still below the pre-pandemic trend and inflation continues to be driven more by domestic supply conditions than international factors. ”The RBI may, however, consider slowing the pace of policy rate hikes until next year because economic activity, although increasing, remains below the pre-pandemic trend. At the same time, allowing the exchange rate to serve as an automatic stabilizer will help improve the balance of payments position,” as per the ADO Update. The RBI has increased the policy rate by 140 basis points (1.4 percent) over 4 months to contain inflationary expectations. High inflation due to elevated oil and commodity prices will likely require continued tightening monetary policy to ensure that inflation expectations do not get entrenched, which would likely hinder economic growth in the short run, it said. As per the report, India’s exports and growth are expected to be adversely affected due to weaker than expected global demand over the next two years. ADB has cut India’s GDP growth forecast for the current fiscal to 7 percent from 7.2 percent, on the assumption that global demand will remain sluggish and oil prices will remain elevated. For the next fiscal, ADB expects the Indian economy to grow by 7.2 percent as against the 8 percent it had projected earlier. ”Nevertheless, the economy is expected to grow strongly over the forecast horizon, with investment playing a catalytic role. Private consumption will be affected by higher inflation eroding consumer purchasing power even though consumer confidence continues to improve. ”Sticky core inflation will adversely impact spending over the next 2 years if wages fail to adjust,” cautions the ADB report. Even as government subsidy support on fertilizer and gas, free food distribution as well as excise duty cuts will help offset some of the effects of high inflation on consumers, ADB said taxes on packaged food products will likely be a burden on consumers already dealing with rising inflation. The Manila-based agency also expects investment growth to be lower than projected due to the increase in RBI policy rates, increasing the cost of borrowing for investors amid rising global uncertainty. On the rupee, ADB said the RBI has been active in preventing it from depreciating further, resulting in the biggest drawdown of foreign exchange reserves since the 2008-09 global financial crisis. The rupee depreciated from Rs 74.3 to the US dollar in January 2022 to Rs 80 in July. It fell further below Rs 81 this week. ”To minimize the loss of reserves, future interventions should be aimed at reducing wide short-term exchange rate swings rather than stabilizing the rate, thereby allowing it to reflect underlying market conditions and remain an automatic stabilizer,” the ADO Update said.