The Reserve Bank of India (RBI) is likely to face a difficult policy conundrum as it waits for clarity on growth while dousing inflationary fires through words and hope, a Barclays report says.
Rahul Bajoria, chief economist at Barclays India, in the report, said, "Even though the number of COVID-19 cases is now retracing, the hit to growth appears set to last for some time. This means the RBI will once again face the question of when to exit its policy accommodation stance."
RBI may hike the repo rate only by the first quarter of next fiscal (April-June 2022) and continue to maintain the accommodative stance in the interim, Bajoria added. The report also said that any potential rate hikes are ruled out for the current financial year, and the repo rate hike may only happen in the first quarter of the next financial year, FY23.
It can be noted that after responding with deep rate cuts initially, the RBI has limited itself to using non-conventional tools to help the growth process in the economy. However, with the surge in inflation lately - the headline number came at 6.3 per cent for May - there have been questions over the tolerance of the central bank.
The start of policy normalisation will remain contingent on a sustained growth recovery, evidence of which is unlikely to be visible before the end of the current fiscal year, he added.
"Weakening growth prospects and surging inflation place the RBI in a bind. Given this backdrop, we expect the central bank to maintain its accommodative stance, and to continue to rely on the government's supply-side measures to reign in price pressures, while at the same time confirming its commitment to anchoring medium-term inflation expectations," said Bajoria.
Bajoria further said that, "We think the second wave has delayed the economic normalisation cycle by a quarter or two, both in terms of GDP levels and sectoral recovery. Indeed, we now estimate that India will only reach its pre-COVID level of annual GDP by the end of 2021, compared with mid-2021 earlier; this implies two years of zero growth in activity levels. This also means that the central bank needs to wait and watch growth trends, despite a closing output gap, even if the trajectory of inflation is uncomfortable from a policy perspective."
Ineffectiveness of the government's supply-side measures, an un-anchoring of inflation expectations leading to a wage-price spiral, and a return of pricing power are some of the key triggers that could force the RBI into rate action earlier than expected, he said.
The brokerage expects inflation to be at 5.4 per cent for FY22, higher than the previous fiscal's level and attributed the present surge in the price rise situation to global commodity prices.
"India's inflation is being driven by non-domestic factors, limiting policy options and squeezing profit margins," Bajoria said, adding that even if these pressures recede, margin normalisation may keep CPI (Consumer Price Index) inflation elevated and sticky going forward.
The increase in commodity prices is having a direct effect across key sub-components of the CPI, the brokerage said, adding that the increase in food prices over the past two to three quarters has been driven by non-perishables, mainly pulses and vegetable oils, both of which are heavily influenced by global prices.
Similarly, among the components of core CPI, clothing, footwear and industrial products are showing evidence of rising imported price pressures, it noted.
(With input from agencies)
(Edited by Vivek Dubey)
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