The Signal (weekly highlights)

1. Economists expect more rate hikes as CPI inflation hits 8 year high

With the consumer price index (CPI) inflation touching an eight year high of 7.8 per cent in April 2022, experts foresee rapid rate hikes during rest of the fiscal. Inflation to put pressure on the Reserve Bank of India (RBI) to further raise rates as much as 50 basis points (bps) in the upcoming June monetary policy committee (MPC) meeting and then slow the cycle in August to 25 bps hike.

There is a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies to 5.15 per cent.

2. OPEC cuts world oil demand forecast

World oil demand growth in 2022 is expected to increase by 3.4 million barrels per day (mbpd), representing a downward revision of 0.3 mbpd from last month’s report, stated OPEC in its May 2022 monthly oil market report.

Oil demand growth in the second quarter of 2022 is projected to be slower at 2.8 mbpd compared with 5.2 mbpd in the first quarter. Demand in 2022 is expected to be impacted by ongoing geopolitical developments in Eastern Europe, as well as Covid-19 pandemic restrictions.

3. CPI inflation shoots up to 7.8% in April 2022

Retail price inflation, measured by the Consumer Price Index (CPI), shot up to 7.8 per cent in April 2022 from seven per cent in March 2022. This is the highest inflation recorded in the last eight years. Inflation in urban India rose to 7.1 per cent from 6.1 per cent in March 2022 and that in rural India increased to 8.4 per cent from 7.7 per cent.

 The rise in inflation was broad-based. At the all-India level, inflation in the food & beverages group rose to 8.1 per cent in April 2022 from 7.5 per cent in March 2022.

4. Centre contained fiscal deficit at 6.9% of GDP in FY22

Despite total expenditure exceeding the revised estimate (RE) of Rs.37.7 trillion in 2021-22, the central government was able to rein in its fiscal deficit at the revised estimate (RE) of 6.9 per cent of GDP during the fiscal.

The additional outgo was managed by the Centre’s actual net tax receipts, which surpassed the 2021-22 RE by Rs.1.2 trillion. The Controller General of Accounts (CGA) will release the fiscal deficit and expenditure numbers for 2021-22 on 31 May 2022. 

5. IMF hails RBI’s recent policy actions

The International Monetary Fund (IMF) has welcomed the Reserve Bank of India (RBI)’s decision to raise repo rates by 40 basis points (bps). 

Although India has fiscal space in the near-term, it would need to implement a medium-term fiscal consolidation strategy to help improve the trade-off between near-term macroeconomic stabilization and medium-term fiscal sustainability.