RBI is closer to its inflation mandate than other central banks

An analysis by Emkay Global Financial Services Ltd showed that the Reserve Bank of India (RBI) is closer to its inflation mandate than other central banks. The domestic brokerage house points out that inflation in India as measured through consumer price inflation (CPI) is about 100 basis points (bps) ahead of the upper limit of the RBI’s comfort zone of 6%. One basis point is 0.01%. In June, India’s CPI inflation or headline retail inflation stood at 7.01% in June, up from 7.04% in May.

However, inflation in the US and other developed economies is well above central banks’ targets. Brazil is facing a similar situation in emerging markets. According to Emkay Global, inflation in India is around 200 bps ahead of the current policy rate of 4.90%, while inflation in the US, EU, UK and Australia is 400-800 bps above the current policy rate.

So far in this calendar year, RBI has increased the repo rate by 90bps. While global commodity prices are showing some signs of moderation, analysts expect the RBI to continue raising interest rates till CPI inflation moderates significantly.

Note that the Global Commodity Index is down 23% from the peak seen in April.

“The combination of softening commodity prices, a softer global growth outlook and easing supply chain disruptions has increased the chances of a peak in commodity inflation. That said, crude oil prices are likely to remain volatile as weak demand potential. The disruption is balanced by supply-side,” said economists at IDFC First Bank in a report on July 19.

In its upcoming policy meeting in August, the RBI is increasing the repo rate by at least 25 bps.

“We expect the RBI to continue to hike front-loading rates, with CPI inflation expected to average 7.0% in H1FY23,” the IDFC First Bank report said. It added that apart from inflation, another factor supporting the hike in interest rates would be the US Fed, to prevent further capital outflows and intensify depreciation pressure on the Indian rupee.

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