BUSINESS Watch out for inflation, RBI seeks third rate hike...

Watch out for inflation, RBI seeks third rate hike this year


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As it raised the rate for the third time this fiscal year, a total of 140 basis points in three months, the RBI is set to further raise lending rates across the economy and EMIs from existing home loan customers.

RBI Governor Shaktikanta Das told reporters that the MPC has decided to remain focused on withdrawing accommodation to ensure inflation stays within target going forward, while supporting growth.

While he said there are signs right now that “CPI inflation has peaked and is expected to moderate in the fourth quarter of this year and the first quarter of next year,” providing the reason behind the rise in 50 basis points, he stressed, “Inflation still remains at an uncomfortable and unacceptably high level and monetary policy has to act. There are several uncertainties that are clouding the outlook and that is why monetary policy has to act and, therefore, the action of 50 basic points”.

In its statement, the RBI said that as inflation is expected to remain above the upper threshold in the second and third quarters, the MPC stressed that sustained high inflation could destabilize inflation expectations and harm growth in the future. medium term.

“The MPC, therefore, considered that a greater calibrated withdrawal of monetary accommodation is justified to keep inflation expectations anchored and contain the effects of the second round. Consequently, the MPC decided to increase the policy repo rate by 50 basis points to 5.4 percent,” he said.

Despite the 50 basis point increase, the second such increase in two months and a total increase of 140 basis points in three months, equity markets remained strong with the benchmark Sensex index on the BSE closing the day at 58. 387, a gain of 89 points.

While acknowledging that the Indian economy has been naturally affected by the global economic situation (global inflation increases, tightening of financial conditions, strong appreciation of the US dollar and lower growth in all geographies) and has been grappling with the problem of a higher inflation, Das said India is expected to be among the fastest growing economies during 2022-23 (IMF projection) due to its strong and resilient fundamentals.

The RBI has maintained a GDP growth of 7.2% for the fiscal year 2023 and has projected a real GDP growth of 6.7% for the first quarter of 2023-24.

“In an ocean of great turbulence and uncertainty, the Indian economy is an island of macroeconomic and financial stability. Economic growth is resilient and is there despite two black swan events and multiple shocks,” Das said.


Global headwinds to growth

With the latest 50bp increase, the benchmark RBI rate is now higher than the pre-pandemic level of 5.15% in October 2019. Retail inflation then was 4.62% compared to 7 % in June. As further rate hikes are not ruled out, growth in India will also depend on the global economic outlook, which remains uncertain.

He said that domestic economic activity has been showing signs of expansion. If on the urban demand front there is a rebound in the production of consumer durables, domestic passenger air traffic and the sale of passenger vehicles, rural demand indicators have shown mixed signals.

“High-frequency service sector indicators such as rail freight traffic, port freight traffic, e-invoicing, toll collection and commercial vehicle sales remained strong in June and July. Investing activity is also picking up… Manufacturing PMI rose to an 8-month high in July,” he said.

It also said that capacity utilization in the manufacturing sector has exceeded its long-term average, “indicating the need for new investment activity in creating additional capacity.”

According to the RBI survey, capacity utilization in the manufacturing sector in the fourth quarter of 2021-22 increased to 75.3% compared to its long-term average of 73.7%.

The central bank has also projected inflation of 6.7 percent for the year 2022-23. Anticipating their concerns about further price increases, the RBI pointed to incidents of excessive and unseasonal rainfall, further transmission of input cost pressures to sales prices in the manufacturing and service sectors.

“Taking these factors into account, and assuming a normal monsoon in 2022 and an average crude oil price (Indian basket) of $105 per barrel, inflation is projected at 6.7 percent in 2022-23,” Das said.

While consumer price inflation has eased since rising in April, the RBI said it remains uncomfortably high and above the upper target threshold.

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“Inflationary pressures are widespread and core inflation remains elevated. Volatility in global financial markets is affecting domestic financial markets, including the foreign exchange market, leading to imported inflation,” he said.

While RBI projected inflation of 7.1 percent for the second quarter, it expects it to slow to 6.4 percent in the third quarter; and 5.8 percent in the fourth quarter. It has further projected that inflation in the first quarter of 2023-24 will be 5 percent. A drop in inflation depends on the decline in global commodity prices and the decline in domestic edible oil prices due to improved supplies from major producing countries. Resumption of wheat supplies from the Black Sea region, if sustained, could help moderate international prices.

That also pointed towards the growing trade deficit that expanded to $100 billion in April-June 2022 due to record merchandise imports due to soaring global commodity prices.

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