April’s CPI inflation is likely to be a “shocker,” say people familiar with the RBI’s mindset
April’s CPI inflation is likely to be a “shocker,” say people familiar with the RBI’s mindset
A faster-than-expected surge in “war-related inflation” in March and April forced the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) to hold an emergency off-cycle meeting this week and the first repo rate hike since more than three and a half years to announce, said people familiar with central bank thinking.
Inflationary pressures for March, released on April 12, four days after the MPC completed its first monetary policy review of the new fiscal year, were 50 basis points above the RBI’s forecast at nearly 7% and expected to be higher than April’s reading canceled it would be imperative for the MPC to meet urgently to take timely action, said the people, who spoke on condition of anonymity.
The RBI’s daily monitoring of the data had also started flashing red flags as prices were in a steady and faster-than-expected uptrend, necessitating urgent action, they said.
Indonesia’s unexpected decision to completely ban palm oil exports also increased concerns, the people said.
Any further delay could have been counterproductive as the Indian economy would not be able to withstand a larger rate hike of say 150-200 basis points, they added.
Seeing signals that a nasty inflation surprise could happen on May 12 – when April CPI data is expected – the RBI decided to spread its monetary policy response, people said.
Going forward, the RBI is aiming to reverse its previous pandemic-driven rate moves in small increments, much like how it cut rates during the pandemic, they observed.
What has rattled the RBI is the sharp acceleration in retail inflation, 75% of which is due to the war. Cooking oil, wheat, and even cattle and poultry feed prices are rising, adding to inflation. Prices of all commodities except tomato and mustard oil are rising, RBI data says April numbers will come as a “big shock”.
Ahead of Feb. 24, the day Russia invaded Ukraine, the RBI had forecast FY23 GDP growth of 7.8%, which rose 60 basis points to 7.2 at the April MPC meeting % has been lowered. The war had also caused the inflation curve to rise 120 basis points from 4.5% to 5.7%. In the future, the impact is likely to be greater as the war shows no signs of ending, people said.
However, future monetary policy actions would be independently calibrated. The idea of the RBI was to “cross the river by feeling the pebbles” and when the opportunity arises and when the tide changes and the war stops, there is no need to raise rates because the economy needs an accommodating attitude, people said.
While dealing with high inflation, another crisis threatening the global economy was the debt crisis, with about 60% of emerging markets in dire straits. Sri Lanka is just the tip of the iceberg, people said, adding there were fears other countries might follow.
The public warned that the emerging markets crisis could pose a risk, especially at a time when the RBI was almost single-handedly preparing to fight inflation, stressing that the central bank would do everything in its monetary policy powers to crisis counter situation.
