Rise In India’s Retail Inflation May Force RBI To Hold Repo Rates: SBI Ecowrap
SBI Ecowrap also called for a relook at how the Central Statistics Office calculates CPI, a measure of retail inflation.
A surge in India’s retail inflation may force the Reserve Bank of India to maintain status quo on repo rates at the monetary policy review next month, according to a report.
India’s retail inflation, measured by the Consumer Price Index, rose to a five-and-a-half-year high of 7.35 percent in December as food prices spiked. And, in the process, it breached the upper end of RBI’s 2-6 percent inflation target.
"RBI did not cut the rate in December when October 2019 inflation rate was 4.62 percent. Now that CPI has surged to 7.35 percent in December and January inflation is also expected to remain above 8 percent, RBI is likely to hold rate in the next policy," according to SBI Ecowrap, a research report by State Bank of India.
The central bank is scheduled to hold its next bi-monthly monetary policy on Feb. 6.
After cutting the repo rate on five consecutive occasions between February 2019 and October 2019, India’s monetary policy committee left the repo rate unchanged at 5.15 percent in the fifth bi-monthly review announced in December.
SBI Ecowrap also called for a relook at how the government's Central Statistics Office calculates CPI. "Unfortunately, CSO methodology of using CES survey data has resulted in CPI being overstated by 200 bps. Its high time we question the CSO methodology of CPI estimation as it results in erroneous policy decisions.”
The report said inflation is expected to remain high in the remaining months of 2019-20—close to 7 percent and thus averaging to 5 percent for the financial year. "We believe that RBI will go for a long pause possibly throughout 2020 as inflation is likely to remain above 6 percent till June-July 2020," it noted.
Also Read: Can QE Work in India With 7% Inflation?
Given the situation of low growth and high inflation (a possible situation of stagflation), the coming months are crucial for RBI to decide on any action at the repo rate front, the research report said.
According to the first advanced estimates released by CSO, India's GDP growth rate in 2019-20 is pegged at 5 percent—the lowest in 11 years. The World Bank in a recent report has also pegged a similar growth in the economy for the current fiscal.