RBI ‘in a Bind’ amid Weak Growth, Surging Inflation

The central bank is likely to hike the repo rate only by the first quarter of next fiscal

RBI ‘in a Bind’ amid Weak Growth, Surging Inflation
RBI ‘in a Bind’ amid Weak Growth, Surging Inflation
PTI - 29 June 2021

The Reserve Bank of India is “in a bind”, on the grounds of weak growth and rising inflation, a British brokerage said on Tuesday.

The central bank is likely to hike the repo rate only by the first quarter of next fiscal (April-June 2022) and maintain the accommodative stance in the interim, Barclays' Chief India Economist Rahul Bajoria said in a note.

After responding with deep rate cuts initially, the RBI has limited itself to using non-conventional tools to help the growth process in the economy. However, with the surge in inflation lately, there have been questions over the tolerance of the central bank.

“Weakening growth prospects and surging inflation place the RBI in a bind. Given this backdrop, we expect the central bank to maintain its accommodative stance, and to continue to rely on the government's supply-side measures to reign in price pressures, while at the same time confirming its commitment to anchoring medium-term inflation expectations,” Bajoria said.

The start of policy normalisation will remain contingent on a sustained growth recovery, evidence of which is unlikely to be visible before the end of the current fiscal year, he added.

Ineffectiveness of the government's supply-side measures, an un-anchoring of inflation expectations leading to a wage-price spiral, and a return of pricing power are some of the key triggers that could force the RBI into rate action earlier than expected, he said.

The brokerage expects inflation to be at 5.4 per cent for 2021-22, higher than the previous fiscal's level and attributed the present surge in the price rise situation to global commodity prices.

“India's inflation is being driven by non-domestic factors, limiting policy options and squeezing profit margins,” Bajoria said, adding that even if these pressures recede, margin normalisation may keep CPI (Consumer Price Index) inflation elevated and sticky going forward.

The increase in commodity prices is having a direct effect across key sub-components of the CPI, the brokerage said, adding that the increase in food prices over the past two to three quarters has been driven by non-perishables, mainly pulses and vegetable oils, both of which are heavily influenced by global prices.

Similarly, among the components of core CPI, clothing, footwear, and industrial products are showing evidence of rising imported price pressures, it noted.

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