Rising Inflation May Force RBI To Focus on Price Stability, Says SBI Report

SBI has said in its report that RBI will have to intervene if inflation goes on rising

As retail inflation reached a six-month high of 6.30 per cent in May 2021, the State Bank of India (SBI) in a report has noted that localised lockdowns, rising food prices and the second wave of the Covid pandemic have dislocated supply chain even in rural areas. This, it said, is going to manifest in rising prices of essential commodities and cumulatively therefore, all these factors are going to spur core inflation and won't leave the Reserve Bank of India (RBI) with any other option but to check price rise.

The country's biggest lender also said that the rise in retail inflation was a matter of concern and even small items are showing disproportionately larger increases.

"Both core wholesale price index and core consumer price index (CPI) are positive and highly correlated, and the relentless increase in global commodity prices will only imply that core CPI is unlikely to correct anytime soon. In the coming months, domestic inflation trends are likely to raise anxiety levels in the RBI and the Monetary Policy Committee (MPC). Driven by several global and domestic factors, inflation may remain elevated in the coming months," the SBI has noted in its report.

Specifically, the faster than anticipated and robust recovery in some of the advanced countries is likely to exert upward pressure on international commodity prices, including oil.

"Once that happens on a durable basis, it would be impossible for the MPC to look through inflation pressures and remain supportive of growth, given its primary mandate of ensuring price stability. Therefore, repairing the supply chain remains the top priority on which the RBI has little control and hence the Government of India needs to step in a big way," the report added further.

If the RBI has to ultimately increase interest rates or change its stance to combat inflation, it may impact any incipient signs of recovery; on the other hand, being a mute spectator can seriously impair RBI's credibility in fighting inflation, the SBI has cautioned.

"We expect a status-quo in August. We believe RBI would still try to find a marriage of convenience of regulatory and developmental measures and monetary policy in August policy. The die has been cast, but the RBI can still hold out with a firm message of ratcheting up of inflationary pressures in August policy statement," the report concluded.