We Are Currently Tracking Next Month s CPI Inflation At 6 9 EMKAY

The June Monetary Policy Committee (MPC) meeting saw a 50 bps hike due to high inflation. Experts believe this will help in stabilizing the long-term bond market and inflation expectations across the board. Experts deemed this necessary to avoid sudden economic shocks. RBI Governor stated that while inflation is a major concern, but it is also backed by steady economic growth. He also noted that the repo rate is still considerably below the pre-pandemic level while the liquidity surplus is still above.

Talking about their analysis of the situation, EMKAY predicts in their MPC Reprot, “We are currently tracking next month’s CPI inflation at 6.9 per cent but reckon elevated policy pressures as inflation remains above 7 per cent in H1FY23. FY23 could see rates go up by another 75bps, with another 25bps + hike in August. ” Irrespective of the source of inflation, be it from supply or demand side, there is a need to tilt numbers. The triple trouble of sharp goods price fluctuations, supply-chain issues and unstable economic growth, has shifted the narrative in favor of inflation containment.

Err On The Side Of Caution

We are coming out of a pandemic unlike 2008 or 2011, when the economy was getting heated. In such a situation, the experts have a fresh perspective, colored with a mildly hawkish approach on how we should approach the situation.

Michael Patra, deputy governor of RBI believes the age of globalization based on outsourcing is over, and decades of productivity gains from opening up are being reversed, which is now showing up in inflation. For monetary policy, managing expectations is the key rather than materially compressing demand. The idea is to be aware of the direction of inflation rather than its number.

While Ashima Goyal, RBI MPC member provided a fresh perspective by saying rising wages, especially in rural areas, would be a sign of true second-round effects of inflation. However, a number of factors, such as the inflation-targeting regime, the free food program, high unemployment, especially among the youth, slack demand, shown through flat corporate mark-ups, moderate credit growth, and a relatively small deviation from the equilibrium real rate, all indicate that second order effects have yet to materialize.


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