As per State Bank of India’s report, CPI at 4.7% in April substantiates the RBI decision to pause in April. Core CPI plunged to 5.06%, falling to almost 3-years low of 5.06% in Apr’23 as against 5.74% in Mar’23, due to decline in fuel and light prices supported by a base.
A distribution of core CPI (since Sep-21) indicates that the recent print is even below the mean-2*SD mark. This is an optimistic number and may impact the future policy trajectory of RBI.
Item-wise analysis reveals that weighted contribution of food and beverages declined by a maximum by 41 bps in Apr’23 mainly on account of wheat/atta (other sources). Fruits inflation too decelerated significantly with weighted contribution of mango declining by 11 bps in Apr’23.
With CPI declining at 4.7% in April, the question is whether 6.5% is the terminal rate. The authors constructed 4 mutually exclusive scenarios of repo rates by training the data of RBI rate deciding manner for the period of Feb 22 to Nov 22. Data was trained with 1 month lag. In the fourth and most important scenario wherein if MPC considered domestic CPI headline inflation, CPI Core inflation & Fed rate hikes, while taking a call on repo rate, the current repo rate would have been at 6.22%. Given that the current rate of 6.5% is already higher than the required rate of 6.22%, they expect one more pause by RBI MPC meeting in June 23, while carefully watching the CPI and Core CPI number in ongoing months. They believe that the machine learning is indicating that this terminal rate could decline to 6% with the next quarter. This would possibly open up opportunities for RBI to look at the data trends more carefully for a rate action towards the end of the year.
However, the concern remains on growth front. More importantly India remains at the forefront of the most vulnerable countries to the likely adverse impacts of climate change, ranking 7th out of 181 in the Global Climate Risk Index 2021 despite slew of controlling measures initiated on Green House Gas emissions along with promoting renewable energy and curtailing energy usage/consumption while adopting futuristic climate policy of late. More than 3/4th of Indian districts are considered hotspots for extreme climate events which have a direct bearing on price prints volatility (mostly supply side). It is evident that climate change poses a significant threat to India, impairing future growth materially if friction points remain significantly unchecked in time.
While Skymet has projected disparities in average rainfall this year for the country (Below Normal), IMD projections are more upbeat and tuned to a normal distribution pattern. Credit, Insurance and Capital markets remain quite vulnerable to both physical as also transition risk emanating from multiple drivers as we brace for the return of El Nino this year. On a positive cue, the report states, Fed has likely reached its terminal rate, soothing frayed nerves of markets going ahead.
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