High inflation to compel RBI to signal neutral policy stance: S&P

The RBI will likely raise the repo rate by at least 50-75 basis points through FY23, and by another 50 basis points in FY24, the ratings agency said

The Reserve Bank of India (RBI) would be compelled to signal a neutral policy stance in the Monetary Policy Committee’s review meeting in April as average consumer inflation is likely to stay firm at 5.4 per cent in FY23, S&P Global Ratings said in a note. 

The RBI will likely raise the repo rate by at least 50-75 basis points through fiscal year 2023, and by another 50 basis points in fiscal 2024, the ratings agency said.

Separately, Moody’s Analytics said if the US Federal Reserve accelerates its path to policy normalisation, the RBI may have little choice but to commence policy tightening as inflation remains elevated.

The rise in inflation will make RBI signal a neutral stance in its April review meeting, followed by a normalization of the policy-rate corridor (the gap between the repo and reverse repo rate). This will involve an increase of the reverse-repo rate, S&P said.

High inflation will dampen private consumption--the largest component of demand--and the last to recover from the pandemic, the ratings agency said. 

“The government may end up using fiscal policy more aggressively than it laid out in its budget for fiscal 2023. This will help those most affected by the pandemic until investment-led growth lifts the labor market, and private consumption demand becomes self-sustaining,” S&P said.

India’s retail inflation rate or CPI came in at an eight-month high in February--remaining above the RBI’s upper targeted limit of 6 per cent for the second straight month--at 6.07 per cent.

Central banks around the world are watching the U.S. Federal Reserve, and the RBI would have to go for policy tightening if the US Fed accelerates its path to policy normalisation. However, it will have to “thread the needle carefully; moving either too fast or too slow would be detrimental.”

Disruption to exports

After exports from Asia-Pacific region have continued to rise on the back of accelerating global trade, exports from the region may see some disruption due to obstruction at some manufacturing locations following rising Covid-19 cases in China, the report by Moody’s Analytics said. 

Exports from Asia-Pacific countries continued their rise in the early months of this year, and India, South Korea and Malaysia have benefitted from strong demand and price increases for basic commodities such as palm oil, crude oil and food grains, semiconductors and their components, autos and auto parts.

However, the coming months may see some disruption of the region’s export base, Moody’s Analytics. “The rising caseload of Covid-19 in China is causing local, if temporary, disruptions to some manufacturing locations and transport corridors. China’s technology center, Shenzhen, suffered brief shutdowns of manufacturing plants and port facilities last week,” it said.