India's RBI may hike repo rate by 25 bps in Jun, Aug: SBI report

It said given that the spread between government securities yields and repo rate jumps in an increasing interest rate cycle, the former could touch 7.75 per cent by September.

In its monetary policy announced recently, RBI had left the repo rate unchanged at 4 per cent. The monetary panel also decided to stay accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

Retail inflation, as measured by the consumer price index (CPI), surged to 6.95 per cent on yearly basis in March compared to 6.07 per cent in February, primarily on account of spiralling food prices.

The Russia-Ukraine conflict has significantly impacted the trajectory of inflation. The March 2022 inflation print shows wheat, protein items (chicken in particular), milk, refined oil, potato, chillies, kerosene, firewood, gold and LPG contributing to the overall inflation in a substantive manner.

The pressure on sunflower oil supplies from Ukraine has led to changes in export policy from Indonesia, thereby leading to lower palm oil imports, the report said.

There was a huge gap between wholesale price index (WPI) and CPI food inflation with WPI food prices being higher than CPI food prices, which indicated incomplete pass through of prices. The gap was 4.7 per cent in January 2022 and it has now reduced to 2.3 per cent.

The report's estimates show that one per cent increase in the minimum support price (MSP) leads to a rise of four basis points in CPI inflation.

"Thus, overall higher MSP should lead to upside risk to CPI inflation of 48-60 bps over our earlier inflation forecast of 5.8 per cent. Thus, taking the impact of MSP on inflation, CPI inflation could be pushed above 6 per cent in FY23. This is higher than RBI inflation at 5.7 per cent," the report said.

Inflation prints are now likely to stay higher than 7 per cent till September, it said, adding that beyond September, inflation prints could hover in the range of 6.5-7 per cent.

"Our FY23 inflation forecast is now closer to 6.5 per cent, taking into account the possibility of an extended food price shock," the report added.

ALCHEMPro News Desk (DS)