RBI to stay in ‘wait-and-watch’ mode, supply side induced hike in inflation under watch
Yes Bank expects the RBI to maintain a wait-and-watch approach on interest rates despite rising inflation, as supply-side shocks have not triggered broad second-round effects. July WPI inflation eased slightly to 9.8 per cent, while manufacturing input pressures remain elevated
New Delhi: While a policy rate hike is surely not a zero probability event, the bar for the same appears high for now, with the Reserve Bank of India (RBI) likely to look through the supply side induced increase in inflation, according to a new report.
Yes Bank’s own estimates indicate headline WPI averaging 9.0 per cent for the year while headline CPI is expected to be at 4.8 per cent (year-on-year). “As we had indicated in our CPI note, ‘Steady upward climb without rude surprises’, given that recent supply‑side shocks have not yet translated into broad second‑round effects, the case for the RBI to maintain a ‘wait-and-watch’ approach remains intact,” the note mentioned.
The uncertainty bordering the resolution of the West Asia crisis is the crucial risk for manufacturing input costs. With the gap between retail and wholesale inflation persisting, one cannot rule out pass-through from the WPI side to the CPI, “even as we think that the government will hesitate from further passing on under-recoveries of the OMC to pump head prices of petrol and diesel,” according to the note.
Headline WPI for July came in at 9.8 per cent YoY, in line with expectations (9.75 per cent), exhibiting a mild softening from 9.9 per cent YoY in June.
“Even as input price concerns show some easing, the critical issue is its sustainability, given uncertainties on the West Asia crisis resolution. As we await for a sense of the extent of pass-through from the WPI to the CPI, we reiterate our view for the RBI to stay on wait-and-watch and delay any rate action, despite expectations of Headline CPI rising,” Yes Bank said in its note.
For July WPI print, core side price rise remains a concern with underlying price pressures in manufactured categories continuing to firm.
On the producer‑side, Output PPI remained broadly aligned with wholesale price trends, while the Input PPI provided some respite as input costs eased for the second consecutive month, partly driven by the cooling in petroleum and chemical‑linked inputs.
However, it needs to be noted that most global commodity prices remained firm in July, and similar trends are seen for August, said the note.
