2% rise in inflation a matter of concern: SBI's economists

SBI's economists have raised concern over rise in CPI inflation by 200 bps in a year's time. CPI inflation increased to 6.30 per cent on yearly basis in May 2021 as compared to 4.23 per cent in April 2021. This 200 bps increase on yearly terms and 100 bps increase in monthly terms is a matter for concern and even small items are showing disproportionately larger increases, says Ecowrap, the research wing of the country's largest lender.

Rising food and commodity prices as well as localised lockdowns have led to sharp increase the headline numbers. Meanwhile, core inflation has also increased to 6.55 per cent and the last time it was seen around this level was in Jun'14.

SBI's economists have revised CPI projection for the current fiscal. "We are now revising our CPI average for FY22 to 6.1 per cent and core inflation is likely to print at 6.4 per cent. Interestingly, latest core inflation is outside the mean plus 2* (standard deviation) if construct a bell curve using one year's data. Both core WPI and core CPI are positive and highly correlated. And the relentless increase in global commodity prices will only imply that core CPI is unlikely to correct anytime soon," says SBI's chief economic advisor, Dr Soumya Kanti Ghosh.

In the coming months, domestic inflation trends are likely to raise anxiety levels in the RBI and the MPC. Driven by several global and domestic factors, inflation may remain elevated in the coming months. Specifically, the faster than anticipated and robust recovery in some of the advanced countries is likely to exert upward pressure on international commodity prices, including oil. The latter being an intermediate good in leading EMEs, it would generate cost push inflation, he added.

Moreover, the ravages after the second wave of the pandemic and location-specific lockdowns in major Indian states have further dislocated supply chains even in rural areas which is going to manifest in rising prices on essentials. Cumulatively, this could significantly ratchet up core inflation. Once that happens on a durable basis, it would be impossible for the MPC to look through inflation pressures and remain supportive of growth, given its primary mandate of ensuring price stability. Therefore, repairing the supply chain remains the top priority on which the RBI has little control – the Government of India needs to step in a big way. If the RBI has to ultimately increase interest rates / change its stance to combat inflation, it may impact any incipient signs of recovery; on the other hand, being a mute spectator can seriously impair RBI's credibility in fighting inflation.

As per Ecowrap, there may be status quo on key policy rates in August. 'We expect a status-quo in August. We believe RBI would still try to find a marriage of convenience of regulatory and developmental measures and monetary policy in August policy. The die has been cast, but the RBI can still hold out with a firm message of ratcheting up of inflationary pressures in August policy statement. On a separate note, India must meaningfully vaccinate a large segment of the rural population in Q2 so that it can effectively beat the new mutant strain in the town', it said.