RBI likely to maintain status quo in August policy, says SBI report

Retail inflation witnessed a significant uptick in May

With retail inflation witnessing significant uptick in May, the Reserve Bank of India (RBI) is likely to maintain status quo in its August monetary policy review, according to a report.

According to the SBI's research report- Ecowrap, inflation may remain elevated in the coming months due to 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 on Wednesday.

It further 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."

The Consumer Price Index (CPI)-based inflation hit a six-month high of 6.3 per cent in May, from 4.3 per cent in April. The inflation reading has breached the RBI's target range of 2-6 per cent.

In the second bi-monthly monetary policy announced on June 4, the central bank left the repo rate unchanged at 4 per cent.

The next Monetary Policy Committee (MPC) meeting is scheduled from August 4 to 6.

The report said 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 per cent in and the last time it was seen around this level was in June 2014.

It further noted that inflation may remain elevated going forward and this is likely to raise anxiety levels in the RBI and the MPC.

"We are now revising our CPI average for FY22 to 6.1 per cent and core inflation is likely to print at 6.4 per cent," the report said.

It said ravages after the second wave of the pandemic and location-specific lockdowns in major Indian states have further dislocated supply chains even in rural areas which are going to manifest in rising prices on essentials.

Cumulatively, this could significantly ratchet up core inflation, it said.

Once that happens on a durable basis, it would be impossible for the MPC to look through inflation pressures and remain supportive of growth, given its primary mandate of ensuring price stability, it said.

"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 also said the country must meaningfully vaccinate a large segment of the rural population in the second quarter so that it can effectively beat the new mutant strain in the town.