Unseasonal Rains Can Impact Inflation Trajectory: SBI

In 2019, unseasonal rains that were much lower in proportion had pushed food prices up firmly by 3 per cent over the 4 months that ended January 2020, according to the report

The State Bank of India (SBI) in a report on Wednesday said that unseasonal rains can play a large role in impacting the inflation trajectory and the terminal repo rate might go higher than 6.5 per cent as the fed rate hike is now at 125 bps in 2022. 

The consumer price index (CPI) inflation for September jumped to 7.41 per cent. A decomposition of CPI food inflation into sub-components shows that on a weighted contribution basis, the food inflation was driven by cereal products and vegetables. The seasonal impact of rains on vegetable prices will now become discernible. 

“Going forward, the unseasonal rains in different parts of the country up to 700 per cent in cereal-producing states could have a significantly large impact on cereal and vegetable prices,” the report stated. 

In 2019, unseasonal rains that were much lower in proportion had pushed food prices up firmly by 3 per cent over the 4 months that ended January 2020. However, food inflation cooled soon after with vegetable prices significantly declining by March 2020, it mentioned.

The problem, however, continued with cereal prices at high levels as such prices are sticky downwards and takes time to mean revert, as per the report.

“Due to unseasonal rain patterns and frequency being witnessed across major states now, the surge in food inflation may led to inflation for December hover above 7 per cent and the quarterly average should come around 7 per cent, above RBI’s projection (6.5 per cent),” the bank said.

Also, the bank estimated that the terminal repo rate in the current cycle could now might extend till Febuary 2022, with a 50 bps rate hike penciled in December policy. 

“The only solace could be a lower crude price and the negative growth in protein rich item eggs and steady deceleration in prices of meat and fish. We are now looking at the terminal repo rate going higher than 6.5 per cent,” it added.

Meanwhile, the capacity utilisation of manufacturing companies after reaching high of 75.3 per cent in Q4FY22 had declined to 72.4 per cent, as per the latest RBI OBICUS survey. 

However, growth in bank credit was seen across all major sectors with 16.4 per cent growth as per the latest number as of 23 September 2022. 

Apart from personal loan, it seems corporate working capital utilisation is continuing to be robust and driving the credit offtake.