Kolkata: To rein in spiraling inflation, the Reserve Bank of India could consider raising the Repo Rate by a jumbo 50 basis points in its December round of MPC (Monetary Policy Committee) meeting, SBI Research has said.
It is one of the steps that the central bank could adopt since “price pressures are becoming more diffused across the consumption basket rather than being concentrated in a few items”. As widely expected, retail inflation climbed to 5.54% in September, driven sharply by upward pressure in food prices. Food inflation reached 7.74% in September mainly due to high prices of onions, ginger, garlic and lemon. In the rural areas, the rate of inflation breached the 6% tolerance level of the Reserve Bank of India and was recorded at 6.08%, while the urban rate was lower at 4.88%.
Two options before RBI
According to SBI Research, the economy policy research unit of the State Bank of India, there are two options before the central bank. “First, it could adopt a calibrated tightening approach by raising the MSF rate in the interregnum by 25 bps from 5.75% to 6%, alongside a 25 bps hike in the repo rate in December which will ultimately lead to a MSF rate at 6.25%. Second, the RBI could opt for a more decisive 50 bps hike in the repo rate in December policy signaling a stronger
commitment to containing inflationary pressures. The choice between the two options would depend on the persistence of inflation and the trajectory of the rupee going forward,” wrote the agency in its note.
Calibrated tightening
On October 7, after the MPC meeting ended, RBI governor Sanjay Malhotra said that they are adopting a stance of calibrated tightening and their policy response will depend on how persistence the price pressures are, which will, in turn, depend on the energy prices and food prices. The energy prices will also significantly determine the movement of the rupee. SBI Research points out that the RBI’s key priority will be “to prevent temporary supply-side shocks from translating into broader and more persistent inflationary pressures”.
Q3 inflation estimate at 6.5%
SBI Research estimated that retail inflation will rise to around 6.5% and 5.6% in Q4. It also said that the average inflation for FY27 will be 5.3%. “The estimate largely depends upon pressures from supply side on account of the deficient monsoon, ongoing El Niño conditions and high energy and other commodity prices,” mentioned the agency. On the other hand, RBI estimates put the Q3 and Q4 inflation forecasts at 6% and 5.7%.