RBI seen holding rates even as retail prices top inflation target

Consumer prices rising above the Reserve Bank of India's inflation target for the second straight month may have raised fears of a policy rate increase, but many economists expect the central bank to maintain its accommodative stance to support economic recovery.

They cited easing of commodity prices from their peaks and the RBI's high inflation projections for the current quarter to insist that a policy rate hike at this juncture appears remote.

The Reserve Bank has kept the policy rate unchanged at 4% since May 2020 and continued with its accommodative stance to ensure adequate liquidity to support growth and durable economic recovery.


"For now, we see the RBI MPC (monetary policy committee) on hold on all rates in the April 8 policy," said Astha Gudwani, India economist at Bank of America Securities. The brokerage expects the central bank to continue to stay accommodative even if inflation stays elevated, he said.

While retail inflation as per Consumer Price Index (CPI) breached the RBI's target band of 2-6% in January and February at 6.01% and 6.07%, respectively, they are not far from the central bank's revised projections.

The RBI in its February statement projected inflation of 5.7% for the current quarter and 5.3% for 2021-22. In the June policy statement, it had projected 5.1% retail inflation for 2021-22 and 5.3% for the fourth quarter.

Even as the Russian invasion of Ukraine and subsequent sanctions against Russia have a direct impact on the global energy market, a fall in global crude prices (Brent) by over 20% in the last one week from a peak of $127 a barrel on March 7 to about $100 a barrel on Tuesday is seen as a comforting factor for Indian monetary policymakers. Prices of iron ore and aluminium that India imports fell by 3-6% during the week.

If crude prices were to rise, a 10% change in India's crude basket could impact CPI inflation by as much as 20 basis points, according to research house QuantEco Research. But a headroom to adjust excise duties can delay the pass-through of the elevated global prices to pump prices, it said.

Also, food inflation is expected to remain a source of comfort on the CPI front with prospects of robust rabi arrival backed by strong rabi sowing acreage (at 70 million hectares), adequate buffer stocks along with supply-side interventions taken by the government in case of edible oil and pulses, according to Acuite Ratings and Research.

RBI deputy governor Michael Patra had last week hinted at continuation of pro-growth policy.

"Even though fiscal consolidation is underway, there is still some stimulus in the economy that will last through 2022-23, as estimates of the fiscal impulse suggest," Patra had said in a speech. "While the fallout of the geopolitical situation is being assessed and will be factored into our projections, it is reasonable to treat it as a supply shock at this stage in the setting of monetary policy."

Experts said the global surge in food prices may have limited impact on inflation back home. "The surge in food prices globally will likely have a very limited impact on India given its closed food markets and ability to use price controls," said Rahul Bajoria, chief India economist at Barclays Capital. "We think retail prices can be shielded through fiscal measures. Fertiliser subsidies may be increased, excise duties on gasoline may be reduced, and the government may contemplate providing subsidised cooking oil in the interim."