RBI may hike rates by 75 bps by August: SBI Economists

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RBI may raise rates by 75 bps by August: SBI economists

Highlights

  • At least 59% of accelerated inflation is responsible for the war in Ukraine, SBI economists say.
  • The RBI is set to raise rates by another 0.75 per cent
  • Economists say they have conducted a study on the impact of the Russian attack on inflation.

At least 59 percent of the accelerated inflation is due to the impact of the geopolitical conflict caused by Russia’s aggression in Ukraine, SBI economists said on Monday. In the face of rising inflation – headline numbers for April reached about 7.8 percent, and the RBI set the repo rate to raise further 0.75 percent to return to pre-epidemic levels of 5.15 percent, they added.

Economists say they have conducted a study on the impact of the Russian attack on inflation, which revealed that 59 percent of the price jumps were due to geopolitical events.

Using February as the base case, the study found that war alone contributed 52 percent to food and beverage, fuel, light and transportation growth, while input price jumps for the FMCG sector accounted for another 7 percent. .

Noting that inflation is unlikely to improve soon, the note notes that there is a difference between rural and urban areas in terms of price increases. The former are more affected by higher food price pressures, while the latter are more affected by rising fuel prices.

“In contrast to the steady rise in inflation, it is now almost certain that the RBI will raise rates in the coming June and August policy and bring it to pre-epidemic 5.15 percent by August,” he said, adding that the biggest question the central bank worries about is war-related disruptions. If not, will such a rise in rates lead to a significant reduction in inflation?

It is also important to examine whether growth can be a major loss in the face of large and sustained rate hikes, even if inflationary prints continue to be a matter of serious concern, the note added.

Supporting the RBI’s move to curb inflation through rate hikes, economists say the rise could also have a positive effect. “A higher interest rate will also be positive for the financial system as the risk will be re-evaluated,” it says.

They also suggested RBI intervention in the NDF (Non-Deliverable Forward) market instead of the onshore market through banks to support the rupee as it has the advantage of not affecting the rupee’s liquidity.

“It will also save the foreign exchange reserves, with the sole settlement of the amount of difference with the opponent on the maturity date,” they added.

Read also: Steps taken by RBI and government to reduce the period of high inflation: Finmin Report

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