RBI closer to its inflation mandate than other central banks

19 Jul , 2022 By : Kanchan Joshi

Global central banks have been on a spree to raise interest rates to tame inflation.

An analysis by Emkay Global Financial Services Ltd showed that the Reserve Bank of India (RBI) is closer to its inflation mandate compared with other central banks. The domestic brokerage house points out that inflation measured via the consumer price inflation (CPI) in India is around 100 basis points (bps) ahead of the upper limit of RBI's comfort zone of 6%. One basis point is 0.01%. In June, India's CPI inflation or headline retail inflation stood at 7.01% in June, a slight moderation from 7.04% in May.

However, inflation in the US and other developed economies is way above the central banks’ targets. Among emerging markets, Brazil is facing a similar situation. According to Emkay Global, inflation in India is around 200bps ahead of current policy rate of 4.90%, whereas, in the US, EU, the UK and Australia, inflation is 400-800bps above the prevailing policy rate.

So far in this calendar year, the RBI has raised repo rate by 90bps. Although global commodity prices have shown some signs of moderation, analysts expect the RBI to keep raising interest rates until CPI inflation eases meaningfully.

Note that the Global Commodity Index is down 23% from the peak seen in April.

"The combination of moderation in commodity prices, softer global growth outlook and reduction in supply chain disruptions, have raised the prospects of goods inflation peaking. That said, crude oil prices are likely to remain volatile as weaker demand is balanced by potential supply-side disruptions," economists at IDFC First Bank said in a report on 19 July.

At its upcoming policy meeting in August, RBI is seen hiking the repo rate by a further 25bps, atleast.

"We expect RBI to continue front-loading rate hikes with CPI inflation expected to average at 7.0% in H1FY23," added the IDFC First Bank report. Apart from inflation, another factor supporting front-loading of rate hikes will be the US Fed, to prevent further capital outflows and intensification of depreciation pressures on the Indian rupee, it added.