Inflation set to average to 9-year high at 6.9% in FY23: India Ratings and Research

The average headline inflation is set to accelerate to a nine-year high at 6.9 per cent in FY23, and the Reserve Bank may go for more rate hikes during the fiscal, a domestic ratings agency said on Wednesday.

The RBI will hike rates by another 75 basis points and possibly up to 125 basis points (1.25 percentage point) as well if the turn of events and data are very adverse, India Ratings and Research said in a note.

"The first rate increase by the RBI could be of the order of 0.50 per cent in the June 2022 policy and another 0.25 per cent in the October 2022 policy," the agency said, adding that the cash reserve ratio could also be hiked by another 0.50 per cent to 5 per cent by the end of the fiscal.

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In a surprise move, the RBI on May 4 hiked the repo rate at which it lends to the system by 0.40 percentage point, and also the CRR or the percentage of deposits banks have to park with the central bank by 0.50 percentage point in an off-schedule meeting as it saw threats to the inflation target.

The Consumer Price Inflation (CPI) came at 7.8 per cent for April, making it another month where the RBI's upper tolerance band of 6 per cent was missed. All the analysts are sure about more such hikes being in the offing and some dent to growth has a result of the same.

Retail inflation will increase till September 2022 and start declining gradually thereafter, it said, adding that it is expected to remain in excess of 6 per cent for four consecutive quarters starting fourth quarter of FY22 till third quarter of FY23.

It can be noted that under its pact with the government, the RBI is mandated to contain inflation inside 6 per cent and the number breaching for three consecutive quarters will lead the central bank to formally explain the reasons for the same.

The rating agency said retail inflation averaged 4.1 per cent between FY16-FY19 crossed the 6 per cent tolerance number for the first time in December 2019, just at the cusp of the Covid-19 pandemic. Despite the collapse of demand in the pandemic, the monthly retail inflation mostly remained in excess of 6.0 per cent till November 2020 because of supply-side disruption.

Thereafter, the monthly retail inflation till December 2021 had mostly remained below 6 per cent but again breached the mark in January 2022, and continued being higher till April.

Referring to RBI Governor Shaktikanta Das' oft-repeated phrase of the ongoing geopolitical events being a "tectonic shift", the agency said this means that the future inflation trajectory is going to be heavily contingent upon the evolving geopolitical situation which is in a flux.

Meanwhile, the rating agency also said that the rupee also remains under pressure as a result of the fund outflows as rates tighten globally, and imports keep rising due to hardening of oil prices. The rupee will depreciate by nearly 5 per cent and average at Rs 78.19 against the dollar in FY23, it said.