Inflation Surges, Further Policy Action Not Too Distant

  • The rate of inflation indicated by Consumer Price Index (CPI) surged to 7.79 % in the month of April 2022, from 6.95 % in March 2022. This is the highest inflation rate in almost eight years, and the fourth consecutive month during which inflation remained above the ceiling of the RBI’s policy target range. This surge was expected as the rise in oil prices was to get reflected fully in this number after a brief period of freeze in domestic fuel prices. But the present number exceeds the general consensus on CPI which gravitated towards the 7.50 % level. The highest level recorded last was 8.33% in May 2014.


  • The current spiral of inflation is mainly due to rising fuel and food prices. The fuel prices rose from 7.52% in March to 10.80 % in April, while food prices rose from 7.68% in March to 8.38% in April. The edible oil prices too, remain elevated with expected fall in the supplies of palm oil and sunflower oil


  • The rural-urban dichotomy in the inflation intensity is visible now. Rural inflation rose to 8.38% in April as against 7.66% in March. The urban inflation is at 7.09% in April in comparison to 6.12% in March. This may have a differing impact on the consumption and spending patterns in rural and urban centres over the coming months. Core inflation too has gone up, from 6.60 % in March to 7.35% in April. So, on all counts the price level remains a matter of concern from the demand and consumption angle, and also from the policy perspective


  • Fuel prices may not come down too fast and too easily. Though the prices shot up to US$ 120 and above immediately after the Russian invasion of Ukraine, subsequently the prices slumped towards the US$ 100 – US$ 105 levels. These levels around US$ 100 was already targeted before the war situation developed in Eastern Europe. The primary reasons for the up-move in oil prices which started in Sept-Oct 2021, was two-fold, one, the global oil demand had already reached the pre-pandemic peak levels, and two, the capacity of OPEC + for production and supply of more oil was limited. These fundamental factors had already pushed the prices higher. Yet another factor that may have consequences for prices is the weak Rupee. This makes imports more expensive, not only oil but all the major imports, and the same would get reflected in the price level. Global agencies have forecast a likely shortage of food grains, and this may be a challenge which many countries will have to grapple with, and it will get reflected in the general price level. We are passing through summer, and this is the time when there are shortages of fruits and vegetables, and generally this condition improves post the monsoon season. Therefore, we may not expect any sudden improvement in the price level, but the pressure on the price level may continue through the rest of the year. Any moderation in price level would depend on the trajectory of fuel prices and food prices, both of which have an external dimension too in varying degrees.


  • Given the higher inflationary expectations, there may be further policy action from the RBI either in the next monetary policy meeting or even before that. This is likely to put pressure on domestic interest rates especially on the market yields. The forecasts shared earlier indicating the likely up-move in the ten-year benchmark to 7.60 % and 7.80 %, are the levels to be watched closely. Investment preferences may be aligned to the time horizon for which funds or liquidity is available. Needless to say with a rise in interest rates, and also with credit multiplier dampeners like the CRR hike, the debt servicing capacity and interest servicing burden of smaller corporates may get adversely affected over a period of time. This should be kept in mind both from an equity investment perspective, and also credit risk perspective for fixed income allocation.


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