RBI rate hike: Rising inflation due to war effects; RBI may rise at 75

According to a survey by economists, about 59 percent of inflation since February is due to war-related factors. But against this backdrop, there are concerns over whether the central bank’s rate hike will be effective in controlling inflation, forcing the central bank to go for a more aggressive rate hike each year.

Using February as a base case when the Ukraine-Russia conflict began, SBI economists’ study found that food and beverage (assuming vegetable price increases were largely due to seasonal factors, mainly domestic) and that energy and light and transport contributed 52% to the war. Due to which the overall inflation has increased since February. “If we add the impact of input costs, especially in the FMCG sector, thus contributing to personal care and impact, then the total impact at the all-India level is 59%, entirely due to the war,” said SK Ghosh, Group Chief Economic Adviser.

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Consumer Price Index (CPI) inflation has exceeded the mandatory upper band of 2-6 percent. Headline CPI inflation rose to 6.95 percent in March, prompting a review of monetary policy on May 4, and benchmark policy raised the repo rate by 40 bps (one bps is 0.01 percent) to 4.4 percent before the June meeting.

The CPI inflation in April reached an eight-year high of 7.69 percent. “However, the key challenge facing the central bank remains whether such a rate hike would significantly reduce inflation if war-related disruptions do not subside quickly.”

Even in a situation where tackling supply-side issues plays a big role in tackling inflation, even demand and inflation expectations may be driven by central banks, some economists say. “Rising prices will slow down growth in demand. It cannot affect the causes of the war,” said Madan Sabanvis, chief economist.

. “But if rates go up and credit goes down, so does the demand for cement and steel, which lowers inflation. If there is no demand, companies will not invest. So this part of inflation is controlled. It affects all parts of the world. And prices have been reduced. ”

The Russia-Ukraine conflict is showing no signs of abating, which could put further pressure on CPI inflation. “The Russia-Ukraine conflict is showing no signs of abating. In fact, the unbridled stance of the two sides seems to have degraded the geopolitical environment. This has put further pressure on commodity prices,” the report said. Rating firm Acuite by ratings and research.

Economists expect the RBI to restore the repo rate to a pre-epidemic level of 5.15 percent by August. If inflation continues to rise, the cash reserve ratio or CRR may increase as well as the 100 bps rate increase this fiscal year.

“A higher interest rate will also be positive for the financial system as the risk will be re-evaluated,” Ghosh said.