Mumbai: Arguing that recently retail inflation While not structural but supply-driven and therefore potentially transitory, a foreign brokerage report has projected that the benign interest rate regime will continue at least until next June.
The valuation comes a day ahead of the third bi-monthly monetary policy review on Friday, which is widely expected to leave key rates unchanged at 4 per cent even as consumer prices remain above 6 per cent since May. be. And crude oil prices have been north of $70 a barrel for months.
“We think sticky elevated inflation is not a structural issue. We expect retail inflation to be temporary, more supply-driven and likely to remain volatile over the past few months,” Tanvi Gupta Jain, economist at UBS Securities India, said in a report on Thursday. will be temporary.
Although he averaged CPI inflation at 5.5 per cent in FY12, with core inflation slightly above 6 per cent, a downward trend began at an average of 4.5 per cent for FY13.
Still, it expects the Monetary Policy Committee to leave the repo rate unchanged until at least June 2022 to ensure economic recovery, even if inflation exceeds the medium-term target of 4 per cent in the interim.
She expects the CPI to fall to 4.5 per cent in FY13, assuming that the central bank gradually begins to open up its ultra-easy policy settings as the economic recovery gains momentum.
While the brokerage expects policy normalization to start from the end of FY22, it feels that liquidity surplus recalculation may start soon.
“Its 10-year yield will increase to 6.5 per cent by the end of FY22 and 6.75-7 per cent by the end of FY23.”
Five years of sustained high inflation during FY09-FY13 had created a broad view that inflation is a structural problem. Since the RBI adopted the inflation targeting regime since April 2016, inflation has averaged close to 4 per cent pre-pandemic, mainly on low food prices and weak growth.
Despite downside risks outweighing our base case of 5.5 per cent for FY12 and 4.5 per cent for FY13, retail inflation is unlikely to strengthen, as negative output gap will extend well into next year. Will remain from
Gupta-Jain argued that the data indicates that most CPI inflation increased as the pandemic led to higher food and global commodity prices.
On the impact of rising fiscal imbalances and monetization of deficit on inflation, he said, “At present, we believe that the risk of unwanted inflation due to purchase of government debt by the central bank is limited by the slow expansion of credit as well as excess capacity.” economy due to weak demand conditions as income levels remain low/stagnant”.
She also does not think that negative real interest rates again exacerbate macro stability risks, as unlike before, in this cycle of high inflation, household savings have actually grown despite lower interest rates, primarily from the pandemic. Because of the induced uncertainty.
Therefore, he expects that in the short term, negative interest rates will help mitigate the damage caused by the pandemic by boosting growth, income and employment. But he is quick to add that negative interest rates need to be reversed over an extended period of time to ensure financial stability.
It also expects that inflation induced by rising crude oil prices (9 per cent weighting in the CPI basket) and food (46 per cent weighting in the CPI basket) will both have only a transient effect as the supportive base for deflation paves the way for effects. Will happen. .
The valuation comes a day ahead of the third bi-monthly monetary policy review on Friday, which is widely expected to leave key rates unchanged at 4 per cent even as consumer prices remain above 6 per cent since May. be. And crude oil prices have been north of $70 a barrel for months.
“We think sticky elevated inflation is not a structural issue. We expect retail inflation to be temporary, more supply-driven and likely to remain volatile over the past few months,” Tanvi Gupta Jain, economist at UBS Securities India, said in a report on Thursday. will be temporary.
Although he averaged CPI inflation at 5.5 per cent in FY12, with core inflation slightly above 6 per cent, a downward trend began at an average of 4.5 per cent for FY13.
Still, it expects the Monetary Policy Committee to leave the repo rate unchanged until at least June 2022 to ensure economic recovery, even if inflation exceeds the medium-term target of 4 per cent in the interim.
She expects the CPI to fall to 4.5 per cent in FY13, assuming that the central bank gradually begins to open up its ultra-easy policy settings as the economic recovery gains momentum.
While the brokerage expects policy normalization to start from the end of FY22, it feels that liquidity surplus recalculation may start soon.
“Its 10-year yield will increase to 6.5 per cent by the end of FY22 and 6.75-7 per cent by the end of FY23.”
Five years of sustained high inflation during FY09-FY13 had created a broad view that inflation is a structural problem. Since the RBI adopted the inflation targeting regime since April 2016, inflation has averaged close to 4 per cent pre-pandemic, mainly on low food prices and weak growth.
Despite downside risks outweighing our base case of 5.5 per cent for FY12 and 4.5 per cent for FY13, retail inflation is unlikely to strengthen, as negative output gap will extend well into next year. Will remain from
Gupta-Jain argued that the data indicates that most CPI inflation increased as the pandemic led to higher food and global commodity prices.
On the impact of rising fiscal imbalances and monetization of deficit on inflation, he said, “At present, we believe that the risk of unwanted inflation due to purchase of government debt by the central bank is limited by the slow expansion of credit as well as excess capacity.” economy due to weak demand conditions as income levels remain low/stagnant”.
She also does not think that negative real interest rates again exacerbate macro stability risks, as unlike before, in this cycle of high inflation, household savings have actually grown despite lower interest rates, primarily from the pandemic. Because of the induced uncertainty.
Therefore, he expects that in the short term, negative interest rates will help mitigate the damage caused by the pandemic by boosting growth, income and employment. But he is quick to add that negative interest rates need to be reversed over an extended period of time to ensure financial stability.
It also expects that inflation induced by rising crude oil prices (9 per cent weighting in the CPI basket) and food (46 per cent weighting in the CPI basket) will both have only a transient effect as the supportive base for deflation paves the way for effects. Will happen. .
.