ed: Why, despite rate hikes, inflation in India will take longer to decrease

In April, retail inflation hit a new record high, of 7.79 percent, versus 6.95 percent in March . 59% of the price rise is due to geopolitical events, according to SBI researchers .

NEW DELHI: At a time when major economies are preparing to meet increasing demand for essential commodities, a survey by the State Bank of India (SBI) economists cautioned that India's inflation internals are much different than those of advanced economies like the United States.Despite the fact that the Reserve Bank of India (RBI) took the markets by surprise by making an off-cycle decision to raise its key policy rates earlier this month and is planning to do so again in the coming monetary policy meetings, the study states that inflation will take some time to settle in India.In April, retail inflation hit a new record high, of 7.79 percent, versus 6.95 percent in March.The rise was mainly due to an increase in vegetable and fuel prices.

Nevertheless, it raised questions about whether such rate hikes would be effective at bringing down inflation if war-related disruptions persist.Inflation imported from RussiaEconomists with the help of SBI researchers discovered that 59% of the price rise is due to geopolitical events.The study found that food and beverages, fuel, light, and transport contributed 52% to the increase, with another 7 percent coming from the rise in input prices for the FMCG industry, using February as the base case.Consumers are being concerned about rising food prices, which have already been hampered during the two years of the pandemic, as prices of edible oil and vegetables have soared amid concerns of a decrease in wheat production this year.

In the oils and fats sector, inflation remained at an all-time high of 17.28 percent (18.79 per cent in March 2022), as Ukraine is one of the world's largest sunflower oil producers, and India imports a large amount of the product from the war-ravaged nation.High inflation, higher interest rates, and shrinking foreign exchange reserves have, in turn, pushed the Indian rupee to its lowest point against the US dollar.To put it simply, the rupee and inflation rates are adversely impacting each other, pushing the economy, which was trying to recover from a two-year pandemic decline.A falling rupee means higher prices for exports and study abroad, as well as a rising cost of travel.

Domestic prices of products increased a smidgeon every time the rupee fell, as well in the past.Modest wage rise The study further found that wage increases that are being mirrored in the multi-decadal high annual wage increase are fueling broad-based price pressures across all advanced economies.Indian inflation is in fact different from other economies because of this.During the second quarter of FY22, the nominal rural wages for both agricultural and non-agricultural employees increased in India.

However, the findings indicate that wage growth has remained stagnant.In CPI buildup, the expected contribution of wage growth is still modest.So, even after rate increases, inflation in India will take time to slow down, according to the report.Inflating force is disproportional The note stated that the inflation rate is unlikely to rise anytime soon, indicating that there is a difference between rural and urban areas when it comes to price increases.

The CPI inflation for food and beverages in rural areas was 62% relative to 52% in urban areas.In both categories, vegetable prices played a significant part.In rural areas, even spices and fuel & light were more expensive than in urban areas.On the other hand, the cost of transportation, clothing, milk, and cereals was higher in urban areas.

In the process, monetary policy transmission by banks has gained traction.At this repo rate, banks borrow money from RBI.When the RBI increases the policy rate, it becomes prohibitive for banks to obtain funds from the central bank.This leads to increases in their lending rates.

39.2 percent of loans were benchmarked to external rates as of December 2021, mainly repo.According to the survey, this would raise the interest cost for consumers, thereby lowering demand.On the other hand, the survey said that in such scenarios depositors would have much more value as there could be an equally fast transmission.The large share of public deposits in total liabilities for countries such as India had a huge effect on macro stability and policy transmission, according to the study.

Second, only 1 per cent of the bank's borrowings are currently at the policy rate of 4.4 per cent.Also under full transmission, the repo rate rate could have had a 15-basis point effect on deposit rates (25 bp*59 per cent interest sensitive time deposits), as well as lending rates.Although lending rates will now be increased by only 25 bps, the effect on borrowers could be limited.