Aam Aadmi's woes to persist: Inflation to stay around 7%, interest rate, EMIs likely to rise
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Loading... - Vivaan Arun
- 13 May 2022
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Experts are predicting tough times ahead for Aam Aadmi on the inflation and EMI fronts. They predict inflation is likely to remain on the higher threshold of over 7 per cent till September and will hover between 6.5 per cent to 7 per cent beyond that. Next, the forecast is that the Reserve Bank of India (RBI) may hike benchmark interest rates in both June and August policy meetings by a cumulative 75 basis points. This means high costs and higher EMIs.
The latest ECOWRAP by the economic research arm of State Bank of India (SBI) says that with inflation likely to persist at the 6 per cent mark, the RBI is likely to take a "sledgehammer approach and increase the repo rate aggressively and front-load it."
However, the report anticipates that the RBI will not push the rates up beyond a point to avoid a fall in retail borrowings for homes and other purposes.
RUSSIA-UKRAINE WAR
The Russia-Ukraine conflict has significantly impacted the inflation trajectory since March. The consumer price index (CPI) inflation had surged to 7.79 per cent on a yearly basis in April as compared to 6.95 per cent in March this year mainly on account of food price inflation and the forecast for Financial Year 2022-23 inflation is at 6.5 per cent.
INFLATION
For the four consecutive months, CPI inflation has been more than 6 per cent which is the RBI's benchmark upper tolerance level. The central government, in consultation with the RBI, has fixed an inflation target of 4 per cent with an upper tolerance level at 6 per cent and a lower tolerance level at 2 per cent.
Fuel and light inflation had jumped from 7.5 per cent in March to 10.8 per cent in April. Inflation in transport and communication also increased from 8 per cent in March to 10.9 per cent in April. The breaching of the 7 per cent mark in core CPI for the first time in the last 8 years to hover at 7.07 per cent in April is worrisome.
mportantly, rural CPI has increased to 8.38 per cent from 7.66 per cent in March this year, while in urban areas, CPI increased to 7.09 per cent from 6.12 per cent in the previous month.
The latest April inflation map shows that mass consumption commodities like wheat, protein items (especially chicken), milk, lemon, cooked meal, chillies, refined oil and potato are major contributors to overall inflation.
PRICE RISE
The report cites that the item-wise index indicates that inflation has crossed 20 per cent in 18 items and 10 per cent to 20 per cent is in 63 items. Contribution of items like milk, mustard oil, refined oil, wheat and LPG has crossed 20 bps each in the overall inflation.
The ECOWRAP assesses that the short term softening in inflation in chicken, mustard oil etc. prices was an aberration due to Navratri and other religious festivals.
As per the latest report posted by SBI's Chief Economic Advisor Soumya Kanti Ghosh, there has been a steady increase in the weighted contribution of kerosene and firewood in headline inflation when despite rising prices, the contribution of petrol and diesel to overall inflation has been declining steadily since October 21.
According to Ghosh, a significant increase in the weighted contribution of kerosene will adversely affect demand in rural India.
RBI MAY HIKE REPO FURTHER
With more than 6 per cent average CPI inflation for Q4 FY22 and a projection of 6.30 per cent for the Q1 FY23 the average CPI inflation according to ECOWRAP is likely to remain more than 6 per cent for at least two consecutive quarters. For Q2 FY23, RBI projects 5.80 per cent and with the third consecutive quarter very close to the upper limit of 6 per cent, ECOWRAP expects that RBI may opt for further increase in repo rate.
In an off-cycle meeting, citing inflation concern the Monetary Policy Committee (MPC) of RBI on May 5 unanimously decided to increase the repo rate by 40 basis points(bps). That has led to a hike in the EMIs paid by borrowers.
Sources in the RBI have indicated that the central bank is likely to raise its inflation projection for the current fiscal year in its June monetary policy meeting and there is a likelihood of further interest rate hikes.
The ECOWRAP states that RBI may raise rates both in June and August policy meetings by a cumulative 75 basis points while beyond August, rate actions might be more balanced and judicious. The SBI report says the terminal repo rate is expected to be 5.15 per cent to 5.25 per cent by FY23.
IMPACT ON EMIs
Majority of retail loans in India are benchmarked to an external rate (mostly to RBI’s repo rate) with quarterly reset clause. Due to the last hike and the ones anticipated the loans benchmarked to repo rate may witness an increase in EMI directly with the increase in repo rate as there will be 100 per cent transmission.
According to the report, as of December 2021, around 39.2 per cent of the loans are benchmarked to external benchmarks and the upward tweak in repo rate will eventually increase interest cost on borrowers. The report says that demand may crash due to an increasing rate scenario. It adds that incremental growth in home loans may fall if the terminal repo rate increases beyond 5.25 per cent.
The weighted average lending rate for housing loans stood at 7.48 per cent in FY22. Based on ASCB housing loan data from 2005, the report estimates that 8.75 per cent is the threshold weighted average lending rate for housing loan beyond which incremental housing loan would turn negative.
Thus, with most of the loans now linked to the repo rate, transmission is bound to happen automatically. The SBI suggests that the RBI should not increase the repo rate by more than 1.25 per cent. The prediction is that with a 40bps hike introduced in May, repo may not be increased more than 80 bps. However, for the common borrower with loans for education, home and vehicles, the EMI is expected to go up. Read More...
