India Rating: Inflation FY23 Averages 9-Year High 6.9% Set: India Rating

Average headline inflation will accelerate to a nine-year high of 6.9 percent in FY23 and the Reserve Bank may go for further rate hikes in fiscal year, a domestic rating agency said on Wednesday. The RBI will raise rates by another 75 basis points and possibly up to 125 basis points (1.25 percentage points) as well as if the change in facts and data is very unfavorable, India Rating and Research said in a note.

The first rate hike by the RBI could be an order of 0.50 per cent in the June 2022 policy and another 0.25 per cent in the October 2022 policy, the agency said, adding that the cash reserve ratio could be increased by another one. 0.50 per cent to 5 per cent at the end of the financial year.

In a surprise move, the RBI has raised the repo rate on May 4, which gives the system a 0.40 percentage point, and the percentage of CRR or deposit banks have to park at 0.50 percentage points in a close with the central bank. Schedule a meeting as you face the threat of an inflation target.

Consumer price inflation (CPI) fell to 7.8 percent for April, making it another month where the RBI missed the high tolerance band of 6 percent. All analysts are convinced that more such hikes are in the offing and that some growth has slowed as a result.

Retail inflation will rise until September 2022 and then slowly begin to decline, saying it is expected to be more than 6 percent for the four consecutive quarters from the fourth quarter of FY22 to the third quarter of FY23.

It may be mentioned that under the agreement with the government, the RBI has been compelled to control inflation within 6 percent and the number breach for three consecutive quarters will lead the central bank to formally explain the reason.

The rating agency said that retail inflation averaged 4.1 percent in FY16-FY19, exceeding the tolerance figure of 6 percent for the first time in December 2019, just in time for the Covid-19 epidemic. Despite declining demand in the epidemic, monthly retail inflation was mostly above 6.0 percent until November 2020 due to supply-side disruptions.

Then, monthly retail inflation was mostly below 6 percent until December 2021 but again broke the mark in January 2022 and continued to be higher until April.

Referring to RBI Governor Shaktikant Das’s frequent reference to the ongoing geopolitical events as “tectonic shifts”, the agency said that the future inflation trajectory is going to be heavily dependent on the growing geopolitical situation that is in a current.

Meanwhile, the ratings agency added that the rupee is under pressure due to the outflow of funds due to the tightening of global rates and imports are increasing due to the tightening of oil prices. The rupee will depreciate by about 5 per cent against the dollar in FY23 and average Rs 78.19, it said.