Brace for More Rate Hikes and Weaker Rupee: Ind-Ra
Moneylife Digital Team 19 May 2022
Expecting the retail inflation to average at a nine-year high of 6.9% in FY22-23, India Ratings and Research (Ind-Ra) says the Reserve Bank of India (RBI) will increase the policy rate by 75bps (basis points) at least in the rest of FY22-23.
According to the rating agency, the hike could also be 100-125bps, but this will depend on incoming data, policy actions by global central banks, the global geopolitical situation and its spillover effect on the Indian economy. 
"The first rate increase by the RBI could be of the order of 50bp in the June 2022 policy and another 25bp in the October 2022 policy. Along with it, the cash reserve ratio could also be hiked by 50bp to 5% by the end of FY23. We, therefore, expect the 10-year G-sec to trade between 7.8%-8.0% by end-March 2023," Ind-Ra says.
After averaging 4.1% during FY15-16 to FY18-19, retail inflation had crossed the RBI's upper tolerance band of 6.0% for the first time in December 2019. Immediately after, the economy fell in the grip of the first COVID wave, resulting in the countrywide lockdown starting late March 2020 until May 2020. 
However, despite the collapse of demand, the monthly retail inflation mostly remained in excess of 6.0% till November 2020 because of supply-side disruption. Thereafter, the monthly retail inflation till December 2021 had mostly remained within the RBI's upper tolerance limit of 6.0%, but again breached the 6.0 % mark in January 2022 and has remained so till April 2022 due to the global headwinds caused by the Russia-Ukraine conflict.
RBI believes this conflict is a tectonic shift, the spill over of which has caused not only a sudden spike in inflationary pressures worldwide but also heightened uncertainty. 
"All this means, the future inflation trajectory is going to be heavily contingent upon the evolving geopolitical situation, which is in flux. As the international crude oil prices and both food and non-food commodities are likely to remain high and volatile, it will pose considerable upside risks to the retail inflation trajectory through both direct and indirect effects," the rating agency says.
Ind-Ra expects the retail inflation to increase till September 2022 and start declining gradually thereafter. It says, "The inflation is expected to remain in excess of 6% for four consecutive quarters starting fourth quarter (4Q) of FY21-22 till 3QFY23. Under the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) at US$100 per barrel (bbl), the RBI, in its April 2022 monetary policy, has projected the retail inflation to be 5.7% in FY22-23 and 1Q, 2Q, 3Q and 4Q inflation to be 6.3%, 5.8%, 5.4% and 5.1%, respectively." 
"We expect even the core inflation to remain elevated due to the pass-through of rising input costs such as high industrial raw material prices and transportation costs to output prices," it added.
Rising inflation in advanced economies has prompted global central banks to withdraw the ultra-loose monetary policy and raise their policy rates even before the RBI's policy action on 4 May 2022. 
The US Fed raised its policy rate by 25bps for the first time in March 2022 after a gap of more than three years and followed it with another 50bps rate increase in May 2022.
As expected, Ind-Ra says, the monetary tightening by the US Fed has triggered a portfolio investment outflow. Till 16 May 2022, foreign portfolio investors had pulled out US$21.2bn (billion) from India. 
"This besides higher import bill, has put sudden pressure on the Indian rupee and forex reserve. As this is unlikely to reverse any time soon due to volatile commodity prices and persisting global supply disruptions caused by the Russia-Ukraine conflict, Ind-Ra believes the Indian rupee to depreciate by 4.9% and average 78.19 per US dollar in FY23," the rating agency concludes.
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