The non-food component in the price basket will continue to keep inflation at a high level and result in a “long pause” in interest rates, a foreign bank said on Wednesday.
The central bank is likely to pare the pandemic-driven emergency response as well, the report by Singaporean lender DBS said.It can be noted that the high inflation driven by the food prices has forced the RBI to go for a status quo in rates for the three consecutive reviews of the bi-monthly policy meetings, even as growth continues to be in the negative territory. The RBI expects the GDP to contract by 7.5 per cent for FY21.The bank report said over a six month period, food inflation is likely to ease, but non-food may be sticky on account of rigidity in domestic fuel taxation, marginal hikes in manufacturing costs after months of the shutdown, commodity price rises, telecom price adjustments and return in demand impulses in certain core categories.The recent rally in commodities lends to fresh cost-push impact, especially industrial metals, it said, pointing out that generic steel hot-rolled coil futures are up by over 80 per cent since late-September 2020, while on oil, Brent crude rallied 30 per cent in the December quarter.
“While India’s CPI inflation is expected to ease, 2021 average inflation will stay above the 4 per cent target. Room for outright rate cuts is, thereby, limited, but the central bank will settle into a long pause, with a bias to anchor rates through strong dovish guidance,” as per the report.
It added that an upcoming review of the inflation targets is “unlikely” to result in a material change. The 4 per cent inflation target given to the Reserve Bank of India is up for review post-March.
