With retail inflation witnessing an uptick in May, the Reserve Bank will most likely maintain status quo in its August monetary policy review.
According to the State Bank of India NSE -0.83 %‘s Ecowrap report, inflation may remain on the higher side for a few months because of several global and domestic factors.
“We expect a status-quo in August. We believe RBI would still try to find a marriage of convenience of regulatory and developmental measures and monetary policy in August policy,” the research report said.
It also noted that “the die has been cast, but the RBI can still hold out with a firm message of ratcheting up inflationary pressures in the August policy statement.”
In May, the CPI-based inflation hit a six-month high of 6.3%, from April’s 4.3%, breaching RBI’s comfort band of 2-6%. In the second bi-monthly monetary policy announced on June 4, the central bank left the repo rate unchanged at 4%.
The next MPC meet is scheduled from August 4 to 6. The report a dded that rising food and commodity prices, as well as localised lockdowns, have led to a sharp increase in headline numbers. The core inflation also increased to 6.55% in and the last time it was seen around this level was in June 2014.
“We are now revising our CPI average for FY22 to 6.1% and core inflation is likely to print at 6.4%,” the report said.
The second wave of the pandemic and location-specific lockdowns in major states have affected supply chains even in rural areas which will manifest in rising prices on essentials.
“If the RBI has to ultimately increase interest rates / change its stance to combat inflation, it may impact any incipient signs of recovery; on the other hand, being a mute spectator can seriously impair RBI’s credibility in fighting inflation,” the report added. The report added that the only way to beat the new mutant strain is to vaccinate a large segment of the rural population.