Summary of this article
RBI may delay rate hike despite rising inflation concerns
Icra projects 5 per cent inflation for FY27 economy
Higher crude prices may widen fiscal deficit significantly
The Reserve Bank of India (RBI) is unlikely to raise interest rates immediately despite rising inflation risks linked to higher fuel prices and concerns over the monsoon, rating agency Icra said on Monday.
RBI May Wait Before Tightening Policy
According to the agency, the Monetary Policy Committee (MPC) is expected to avoid a rate hike in the near term as the current inflationary pressure is mainly driven by supply-side factors rather than a broad-based demand surge.
“We don't think that the MPC will go in for a rate hike very soon. This is a supply shock. It is very different from the Covid shock, which was a simultaneous supply and demand shock,” Aditi Nayar, Chief Economist at Icra, told PTI.
She also stated that the central bank would likely wait for clearer signs of second-round inflationary effects before taking any policy action. These effects refer to companies passing on higher input costs to consumers through price increases.
Inflation Forecast Raised To 5 Per Cent
The rating agency has revised its average consumer price inflation (CPI) forecast for FY27 to 5 per cent after recent increases in retail fuel prices. This is above RBI’s medium-term inflation target.
However, Icra expects the MPC to remain on hold during the next two policy reviews. It sees the possibility of a policy stance change in October and a rate hike only during the December review if inflationary pressures continue.
“June policy is probably too early,” Nayar told PTI, adding that the August review would provide more clarity on fuel price transmission and monsoon conditions.
At present, the agency expects only one rate hike during FY27. It also said future policy decisions would remain highly dependent on economic data and inflation trends.
Icra’s baseline projections assume crude oil prices averaging $95 per barrel. Under this scenario, India’s GDP growth is expected at 6.2 per cent in FY27, while CPI inflation is projected at 5 per cent and wholesale inflation at 6.6 per cent.
Fiscal Pressure May Increase
The agency warned that higher crude oil prices could create challenges for policymakers by increasing inflationary pressure while also affecting government finances.
According to Icra, higher commodity prices may result in an additional fertiliser subsidy burden of Rs 40,000 crore and fuel subsidies of Rs 50,000 crore. The government could also face a decline of around Rs 15,000 crore in oil marketing company dividends.
In addition, excise duty collections may fall by around Rs 1.1 lakh crore, while direct tax revenues may weaken. Despite some support from higher customs duties on gold and silver and transfers from the economic stabilisation fund, the agency expects a net fiscal slippage of around Rs 1.1 trillion, or nearly 0.30 per cent.
Icra now estimates the Centre’s fiscal deficit at 4.7 per cent of GDP under its baseline scenario. If crude oil prices rise to $105 per barrel, the fiscal deficit could widen further to 5 per cent of GDP.
Nayar stated that the government is likely to continue prioritising capital expenditure even if some discretionary spending comes under pressure during the first half of the fiscal year.
The agency also said that monsoon performance and the impact of an El Niño event would remain important for both inflation and growth.
FAQs
Why has Icra increased its inflation forecast?
The agency has raised its FY27 CPI inflation forecast to 5 per cent due to higher fuel prices and concerns over monsoon uncertainty affecting food prices.
How could higher crude oil prices impact the economy?
Higher crude oil prices may increase inflation, widen the fiscal deficit, raise subsidy costs and slow economic growth during FY27.
