War impact leads to higher inflation: SBI economists

Mumbai:

Economists at SBI said on Monday that at least 59% of the acceleration in inflation was due to the impact of the geopolitical conflict over Russia’s invasion of Ukraine.

In the face of rising inflation – the headline figure for April touched almost 7.8% – the RBI will hike rates by 0.75% to bring the repo rate back to the pre-pandemic level of 5.15%, they added.

Economists said their study of the impact of the Russian invasion on inflation showed that 59% of the price increase was due to geopolitical events.

The study, which uses February as a base case, shows that food and beverages, fuel, lighting and transport contributed 52% of the increase due to the war alone, while another 7% of the impact came from higher input prices in the FMCG sector.

Inflation is unlikely to correct anytime soon, the report said, adding that rural and urban areas have seen differences in price increases. The former was more affected by higher food price pressures, while the latter showed a greater impact from higher fuel prices.

“With inflation continuing to rise, it is now almost certain that the RBI will raise interest rates in its upcoming June and August policies and will raise rates to the pre-pandemic level of 5.15% by August,” it said. The big question, he added, is whether the central bank will need to consider whether inflation will drop significantly as a result of such a rate hike if the war-related do not subside quickly.

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Even if inflation figures will continue to be heavily watched, it will need to examine whether growth will become a casualty if interest rates continue to rise sharply, the report added.

Economists are backing the Reserve Bank of India to raise interest rates to tame inflation, saying they could also have a positive impact.

“Higher interest rates will also have a positive impact on the financial system as risks will be repriced,” it said.

They are also advocating for the RBI to intervene in the NDF (Non-deliverable Forward) market rather than the onshore market through banks to support the rupee, as this has the advantage of not affecting the liquidity of the rupee.

“It will also foreign exchange reserves by simply settling the difference with the counterparty on the maturity date,” they added.


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