In the past few weeks, energy prices have shot up in double-digits on a sequential basis. Oil prices are up 14 per cent MoM at US$83/bbl, and coal prices are up 15 per cent MoM at US$ 200/mt.
“This rise in energy prices, specifically oil, has prompted concerns of higher inflation, slower growth and whether this could lead to disruptive monetary policy tightening,” said economists at Morgan Stanley.
“We believe that while there are upside risks to inflation, we expect growth conditions to improve on a 2Y CAGR basis and policy rates to start normalizing in line with growth recovery,” they added.
According to them, retail inflation will move back toward 5.5 per cent by Mar-22 after remaining below the 5 per cent mark in the next few readings. This is when the RBI said it sees inflation to be within the mandated 4±2 per cent range in the next few months.
The Reserve Bank has projected the CPI inflation at 5.7 per cent during 2021-22: 5.1 per cent in the second quarter, 4.5 per cent in third, and 5.8 per cent in the fourth, with risks broadly balanced. CPI inflation for the first quarter of 2022-23 is projected at 5.2 per cent.
“As such, a continued rise in energy prices, specifically oil, increases inflation risks. Assuming a complete pass through, a 10 per cent rise in oil prices can increase CPI inflation by 40 bps,” said Morgan Stanley.
In the last policy meeting, RBI kept rates steady and vowed to support the market as long as it was necessary. But analysts say a tightening may come sooner than RBI’s commentary suggests.
“We expect normalisation in monetary policy to start with reverse repo hikes in December (of 15-20 bps) and February, to normalise the policy rate corridor to pre-pandemic levels. Indeed, we believe RBI could also take a repo rate hike in February, given growth is expected to improve further,” economists said.
“The risks of sharper and disruptive tightening will emerge if inflation remains higher (above 6 per cent) for longer and or faster-than-expected change in global inflation and monetary policy expectations.”
