Mumbai: arguing that the increase in retail inflation has recently is not structural but driven by supply and therefore potentially temporary, a foreign broker report has estimated that the benign interest rate regime will continue at least until next June.
Assessment comes a day before the third monthly monetary policy review on Fridays where it is widely expected that monetary authorities will abandon the key level that has not changed at 4 percent even though consumer prices have remained above 6 percent since maybe and the price of crude oil is in the North 70 per barrel for months.
“We think sticky inflation is increasing is not a structural problem , However, he conducted a pencil in CPI inflation on average at 5.5 percent in FY22 with core inflation slightly above 6 percent but began the trend down and on average at 4.5 percent for FY23.
But he expects the monetary policy committee to leave the repo interest rates unchanged at least until June 2022 to ensure a safe economic recovery, even if inflation exceeds the medium-term target for 4 percent in a while.
He hoped that the CPI to the lower end to FY23 to 4.5 percent, assuming the central bank gradually began to slaughter policy settings that were very easy because economic recovery gained momentum.
While the broker expects policy normalization to start from the final FY22, he thinks the recall of the liquidity surplus can begin faster.
“This will have a 10-year result to grind 6.5 percent by the end-FY22 and rise to 6.75-7 percent by the end-fy23.” Five years of continuous high inflation during the FY09-FY13 have created a broad view that inflation is a structural problem.
Because the RBI adopted an inflation targeting regime from April 2016, inflation has been close to 4 percent pre-pandemic, mostly at lower food prices and weaker growth.
Even with more upside down rather than the downside risk for our basic case 5.5 percent for FY22 and 4.5 percent for FY23, retail inflation is not possible strongly, because the negative output gap will last until the following year.
Data shows that most increased CPI inflation since the pandemic has been led by higher food and global commodity prices, Gupta-Jain argues.
With the impact of fiscal imbalances and monetizing the deficit in inflation, it said, “At present, we believe that the risk of inflation is undesirable because the purchase of the central bank from government debt is limited by slow credit expansion, along with excess capacity in the economy because of the condition of demand Weak because the level of income remains low / stagnant “.
He also did not think negative real interest rates expand the risk of macro stability again, because it was not as in the past, in a high inflation cycle, household savings had really risen even though interest rates were low, especially because of uncertainty caused by pandemics.
Therefore, he hopes in the short term, negative interest rates will help reduce grated tissue caused by pandemics by increasing growth, income, and work.
But he quickly added that negative interest rates need to be reversed during the extended period to ensure financial stability.
He also hopes that inflation is driven by the increase in crude oil prices (9 percent of the weight in the CPI basket) and food (46 percent weight in the CPI basket), to only have a temporary impact as a way to support the basic effects on disinflation.