March CPI inflation at 6.9% may trigger rate hike cycle from June: Analysts

A higher-than-expected rise in retail inflation, or consumer price index (CPI)-based inflation in March, could lead to India’s first repo rate hike in nearly two years in June, said analysts. Annual retail inflation shot up to a 17-month high of 6.95 per cent in March from a year ago, remaining above the tolerance limit of the Reserve Bank of India (RBI) for a third straight month.

Core inflation, excluding food and fuel, rose to 6.53 per cent in March, compared to 6.22 per cent in February. This is the highest since June 2014. READ ABOUT IT HERE

However, since the industrial production contracted by nearly 5 per cent sequentially in the previous month, it will be very difficult for the RBI to hike the policy repo rate aggressively, analysts said.

Here’s what key brokerages expect from the RBI going forward:

BofA

The actual inflation came in much higher than estimated and added 70/89 basis points to the overall increase. Going forward, we have revised our FY23 inflation projection to 6 per cent YoY from 5.5 per cent earlier.

An important takeaway from the recently concluded RBI meeting was the re-sequencing of priorities by the RBI with inflation now taking the lead. In this backdrop, March’s CPI data will certainly make monetary policy tricky in already uncertain times. We now see a much higher likelihood of the RBI MPC raising policy repo rate by 25 bps in June alongside turning ‘Neutral’.

CLSA

We expect inflation to come in at 6.8 per cent in April and could peak by mid-2022 on a shallow recovery, a good monsoon, La Nina, tight M3 growth, and a stable rupee.

We see 25 bps upside risk to our call that the RBI MPC will raise the reverse repo rate by 50 bps in FY23 (and FY24), with the US Federal Reserve (US Fed) set to hike such 150 bps in 2022. This further supports our call of 10-year bond yield rising to 7.5 per cent in FY23 given the high fiscal deficit.

Credit Suisse

Headline CPI rose 88 bps month-on-month in March while Core inflation rose 33 bps MoM. Imported food inflation remains a major headwind as not just oil/fats, but meat/fish also fed into higher inflation. Y

In the coming months, base effects should ease for some segments, but second order effects such as high freight rates, and a likely weakening of rupee can provide upside pressure to inflation. While the MPC’s Q1FY23 forecast of 6.3 per cent may be beaten, the challenge would be in finessing out the “one-time” contributors.

JPMorgan

Core prices played their part in the upside inflation surprise. Monthly core-core momentum increased another 0.7 per cent MoM in March, taking YoY core at 6.2 per cent — the highest since the core-core computation was possible since January 2015.

Since the RBI will have to explain to the central government/Parliament reasons for missing its upper tolerance limit of the inflation band for three consecutive months, we expect the central bank to do more, and potentially move faster, off very accommodative stance.

We expect the repo rate to head to 5.25 per cent in Q1FY23. Moreover, if inflation averages above 6 per cent in FY23, the RBI can be expected to take policy rates higher and in the range of 5.5-6 per cent band. This, however, will also depend of FY24 inflation forecast.

March’s CPI print increases our conviction of the June policy simultaneously witnessing a stance change to ‘Neutral’, accompanied by a 25-50 bps rate hike.

Barclays

We revise our CPI forecasts to 5.8 per cent for FY23, and now expect four 25bp rate hikes from the RBI in FY22-23, starting from June’s MPC meeting.

SBI EcoWrap

In an interest rate hardening cycle, the spread vaults up to 350 points. 10-year Benchmark yields should thus move towards 7.5 per cent, even with the current repo rate at 4 per cent. We now expect a 25 basis point rate hike each in June and August, with a cumulative rate hike of 75 basis points in the cycle.

Given that the spread between G-sec yields and repo rate jumps in an increasing interest rate cycle, G-sec yields could touch 7.75 per cent by September.