'RBI much ahead in containing inflation but rate hike possible in Aug, Oct'

The Reserve Bank is much ahead of the curve in containing inflation, which appeared to have peaked, though it may go for an interest rate hike in August and October, said an SBI research report on Monday.

After rising to a 95-month (almost 8 years) high of 7.79 per cent in April, Consumer Price Index (CPI) based inflation moderated to 7.04 per cent in May.

Core CPI also moderated in May to 6.09 per cent compared to 6.97 per cent in April, as per the SBI's research report 'Ecowrap'.

"In recent times, there have been commentaries that have questioned whether RBI has been behind the curve in controlling inflation.

 

"We believe RBI is much ahead of the curve in controlling inflation and the Fed can borrow a template from RBI to control US inflation that is all-pervasive and threatens to rip apart global financial stability," it said.

The report has been authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The report further said there are expectations that the RBI could factor in a rate hike in August (as inflation in June is likely to come above 7 per cent) and even in October policy, and take it higher than the pre-pandemic level by October to 5.5 per cent.

"Our peak rate at the end of the cycle now has now a higher probability of a lower bound of 5.5 per cent and a lower probability of going up to 5.75 per cent, depending on inflation trajectory," the report said.

It, however, added that this is purely data-dependent and subject to revisions.

The RBI raised the short-term lending rate by 40 basis points in May and 50 basis points in June, taking the repo rate to 4.9 per cent to tame stubbornly high inflation.

"Our average inflation forecast for 2022-23 is 6.7 per cent but our quarterly inflation numbers are slightly different from RBI.

"The best thing is that the peak of inflation may have been reached at 7.8 per cent, with a little bit of luck," it added.

Earlier this month, the RBI revised upwards its inflation projection to 6.7 per cent for the current fiscal from its previous forecast of 5.7 per cent.

The central bank expects the first quarter inflation at 7.5 per cent; the second quarter at 7.4 per cent; the third quarter at 6.2 per cent; and the fourth quarter at 5.8 per cent, with risks, evenly balanced.