‘Rate hike may not pacify war-induced price gains’

Author: Nishu May 16, 2022 'Rate hike may not pacify war-induced price gains'

SBI economists estimate inflation to rise 59 per cent in March, April due to Russia-Ukraine conflict

SBI economists estimate inflation to rise 59 per cent in March, April due to Russia-Ukraine conflict

SBI’s economic researchers wrote that the Reserve Bank of India’s interest rate hike may not be able to ‘meaningfully’ calm down prices while sacrificing growth, as India’s retail inflation since February has dropped by nearly three- A fifth may be linked to the Ukraine-Russia conflict. in a report on Monday.

SBI economists led by the group said, “In the event of a demand recovery post-Covid, the question would be whether growth could be a major crash in terms of large and consistent rate hikes, even if the inflation print is of grave concern.” Keep the subject. Chief Economic Advisor Soumya Kanti Ghosh wrote.

Inflation, as measured by the Consumer Price Index (CPI), hit an almost eight-year high of 7.8% in April, with rural inflation hitting a 96-month high of 8.4%. The RBI raised benchmark interest rates by 40 basis points in an off-cycle meeting this month and began to open up monetary policy accommodations related to the pandemic.

“Against the continued rise in inflation, it is now almost certain that the RBI will raise rates in the upcoming June and August policy and take it to the pre-pandemic level of 5.15% by August,” Mr. Ghosh said. “However, the key challenge before the central bank remains is whether such rate hikes will bring down inflation in a meaningful way if war-related disruptions do not ease quickly,” he said.

Inflation remains a bug and is unlikely to recover anytime soon, the report warned, adding that the impact in rural areas has been disproportionately higher due to food prices, while fuel prices Since the start of the war in Europe by the pass-through of price effects and high costs, producers have had a similar effect on urban inflation.

Food and beverages, fuel and light, and transport accounted for 52% of the overall increase in inflation since February, according to a dipstick study conducted by SBI researchers to assess the ‘specific impact of war’ on the inflation trajectory in India. has contributed. The economists wrote, “If we add up the impact of input costs on the FMCG sector in particular, adding the contribution of personal care and impacts, the total impact at the all-India level comes to 59 per cent, purely due to war.” ,” wrote the economists.

While he supported the RBI’s effort to curb inflation through interest rate hikes, economists said the larger increase would likely have an impact on nascent growth impulses. “Given the real political challenges in such a distant horizon, the RBI may have to use a smaller window to address inflation concerns,” he wrote.

SBI economists also cautioned that wage growth, which had remained soft so far, may still add to inflation, which may take time to moderate despite rate hikes.

16 May, 2022, 7:50 pm

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