Inflation spike suggests rate hike

by Janaki Samant

Its a little over a week since the Reserve of India (RBI) announced its off-cycle policy repo rate hike of 40 basis points on 4 May. A host of factors now point to the likelihood of another rate hike in the June monetary policy announcement slated for the first week of the month.

The much awaited retail inflation data for April 2022 turned out to be higher than anticipated by the market. Retail price inflation as measured by the consumer price index (CPI) rose to a near 8-year high of 7.8 per cent. Consensus view expected retail inflation to be at 7.5 per cent.

Given the various developments on the domestic and international front, inflation is unlikely to cool down in the near future. With no immediate resolution to the Russia-Ukraine conflict in sight, supply shortages in food, edible oil, metals and fertilisers is expected to keep inflation high. Indonesia banned exports of palm oil to tame its domestic prices. On 7 May, price of a 14.2 kg non-subsidised LPG cylinder for domestic use was hiked by Rs.50 by oil marketing companies (OMCs). On 1 May, the price of 19 kg commercial LPG cylinder was also increased by around Rs.102 per kg. An estimated 5-10 per cent fall in production is expected to keep domestic wheat prices high.

April inflation in the US also turned out to be higher than market expectations raising fears of aggressive rate hikes by the Federal Reserve in the near future. This led to a fall in stock market indices in the US and then, in India too. And also to a selling spree by the FIIs. The resulting depreciation in the exchange rate of the Indian Rupee against the US dollar will further fuel domestic inflation. The rupee weakened to Rs.77.35 against the US dollar on 10 May from 76.75 per US dollar on the previous day. From the average of Rs.74.44 per US dollar in January 2022, the exchange rate has slid to Rs.76.15 per US dollar in April. This works out to a 2.2 per cent depreciation in a matter of four months.

In its April 2022 monetary policy announcement, the RBI brought its focus back on maintaining inflation within the target band, while supporting growth. During the preceding two years, the RBI’s stand was to revive and sustain growth on a durable basis along with ensuring that inflation remained in control. So, the RBI will now give priority to bringing inflation under control.

All these factors add weight to the view that the RBI would go in for another rate hike in its June policy announcement to contain inflation.

The RBI surprised market participants with an off-cycle hike in policy repo rate by 40 basis points to 4.4 per cent on 4 May 2022. This was the first change in the policy repo rate after close to two years and the first hike after 45 months.

A slew of banks raised lending and deposit rates immediately after the RBI hiked the policy repo rate. ICICI Bank, Punjab National Bank , Bank of Baroda and Indian Bank raised external benchmark lending rate (EBLR) by 30-40 basis points (bps). HDFC Bank hiked its Retail Prime Lending Rate (RPLR) on housing loans by 30 basis bps. It also hiked its MCLR by 25 basis points across all tenors. Kotak Mahindra Bank, Union Bank of India and Small Finance Banks such as Bandhan Bank, Jana Small Finance Bank raised fixed deposit rates by 20 to 65 bps. State Bank of India raised interest rates on bulk term deposits by 40-90 basis points.

Interest rates were on an upward trajectory even before the policy rate hike. Led by SBI a number of banks had hiked marginal cost of funds based lending rates (MCLR). Of the floating rate linked outstanding loans of scheduled commercial banks (SCBs), around 53 per cent of the lending by SCBs is at MCLR and close to 40 per cent is at EBLR. A repo rate hike further hastened the process of raising lending rates as floating lending rates linked to external benchmarks got re-priced following the policy hike.

Average daily surplus liquidity has fallen to a little over Rs.6 trillion in the first two weeks of May 2022 compared to over Rs.7.5 trillion in March and April. It will contract further following the hike in cash reserve ratio (CRR) by 50 bps to 4.5 per cent of net demand and time liabilities (NDTL) slated to come into effect from the fortnight beginning 21 May 2022. As a result of the CRR cut, the reduction in liquidity would be of the order of Rs.870 billion.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
8.0 +0.5
Consumer Sentiments Index
Base September-December 2015
68.6 +0.3
Consumer Expectations Index
Base September-December 2015
67.6 0.0
Current Economic Conditions Index
Base September-December 2015
70.1 +0.7
Quarterly CapEx Aggregates
(Rs.trillion) Jun 21 Sep 21 Dec 21 Mar 22
New projects 2.94 3.26 3.53 5.91
Completed projects 0.71 1.28 2.76 1.18
Stalled projects 0.33 0.28 0.06 0.30
Revived projects 1.14 0.39 2.07 0.28
Implementation stalled projects 0.64 0.26 0.65 0.07
Updated on: 26 Jun 2022 3:28PM
Quarterly Financials of Listed Companies
(% change) Jun 21 Sep 21 Dec 21 Mar 22
All listed Companies
 Income 42.3 27.5 23.4 21.6
 Expenses 41.8 26.7 21.3 20.5
 Net profit 140.6 55.3 35.4 32.8
 PAT margin (%) 8.9 9.6 9.0 9.1
 Count of Cos. 4,564 4,690 4,733 4,508
Non-financial Companies
 Income 61.1 35.7 29.1 25.9
 Expenses 62.4 36.0 28.8 26.6
 Net profit 195.2 59.5 19.0 12.9
 PAT margin (%) 8.4 8.8 7.5 7.9
 Net fixed assets 4.9 2.2
 Current assets 10.8 15.3
 Current liabilities 0.8 11.7
 Borrowings 12.1 3.7
 Reserves & surplus 12.4 11.5
 Count of Cos. 3,336 3,387 3,428 3,280
Numbers are net of P&E
Updated on: 26 Jun 2022 3:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -1.1 13.6
 Expenses 0.4 -3.4 10.5
 Net profit -4.4 72.2 58.0
 PAT margin (%) 2.0 4.5 10.9
 Assets 9.0 9.7 9.3
 Net worth 4.8 11.7 9.9
 RONW (%) 3.4 6.9 13.5
 Count of Cos. 32,455 29,998 539
Non-financial Companies
 Income -1.2 -2.3 26.3
 Expenses -1.0 -4.4 25.6
 Net profit -20.8 63.5 42.2
 PAT margin (%) 2.2 4.2 13.8
 Net fixed assets 11.2 2.0 -1.9
 Net worth 2.2 10.7 11.2
 RONW (%) 4.7 8.0 22.6
 Debt / Equity (times) 1.2 1.0 0.3
 Interest cover (times) 1.9 2.5 10.3
 Net working capital cycle (days) 81 85 16
 Count of Cos. 25,743 23,675 386
Numbers are net of P&E
Updated on: 20 Jun 2022 11:46AM