'CPI may have already peaked; Fed can borrow RBI template to control rampaging US inflation': SBI research report

"The CPI data released today came dot along with our projections, belying many expectations built on the far upper side," said the report authored by State Bank of India Group Chief Economic Adviser Dr Soumya Kanti Ghosh while noting that the deceleration in Rural CPI is the major reason for this slowing of inflation in May.

Rural CPI decelerated to 7.01% in May from 8.38% in Apr’22 mainly on account of health, education and personal care and effects whose combined weighted contribution declined by 35 bps and food and beverages whose weighted contribution declined by 40 bps.

Urban inflation on the other hand remained sticky at 7.08%. One divergent trend is visible in case of food and beverages, whose weighted contribution has declined in rural areas but increased in urban areas.

In recent times there have been commentaries that have questioned whether RBI has been behind the curve in controlling inflation, the report said.

"We believe RBI is much ahead of the curve in controlling inflation and the Fed can borrow a template from RBI to control US inflation that is all-pervasive and threatens to rip apart global financial stability. In fact, the pass-through of energy inflation has been sharply higher in the US also and in fact is higher than in India.

"The interesting part is that energy and transport have a higher share in weighted contribution in overall inflation in the US when compared to India. In India, the share of energy in the weighted contribution of CPI inflation is 9.2% while in the US it is 29.2%.

"For transport, it is 36.6% in the US compared to 10.3% in India. We must appreciate the invisible Government hand of controlling inflation in India of limiting the pass-through by employing an activist fiscal policy."

Meanwhile, the global economy continues to grapple with multi-decadal high inflation and slowing growth, persisting geopolitical tensions and sanctions, elevated prices of crude oil and other commodities and lingering COVID-19-related supply chain bottlenecks.

As per World Bank’s latest assessment, global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022. The Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation.

Growth in advanced economies is projected to sharply decelerate from 5.1 percent in 2021 to 2.6 percent in 2022 - 1.2 percentage points below projections in January.

Among emerging market and developing economies, growth is also projected to fall from 6.6 percent in 2021 to 3.4 percent in 2022. The slowdown in the US and EU will adversely impact the Indian exports as export demand may slow down.

An uptick in economic activity in Apr/May’22 is evident in high-frequency leading indicators.

The percentage of indicators showing acceleration (% YoY growth) has risen to 88% and 95% in Apr and May, respectively in comparison to the 55-65% range from Jan to Mar.

Apart from other sectors, responding to the removal of restrictions, the services sector retained momentum which was echoed in high frequency leading indicators recording growth in most trade and transport sectors.

Contact-intensive aviation and tourism sectors recorded sequential improvement, but the recovery remains lagged and will take time to recoup.

The provisional data of ASCB for the fortnight ended 20 May’2022 indicates that aggregate deposits grew by 9.3% YoY, compared to last year's growth of 9.7% and Bank credit grew at 12.1% YoY compared to last year's growth of 6.0%.

The incremental growth in credit is Rs 1.35 lakh crore, compared to last year's negative growth of Rs 1.18 lakh crore.

Robust credit growth was reported across sectors including, the Industry, Services, and Personal segment, which grew by 14.7% YoY, as per the sectoral deployment as of April’2022.

"We are expecting that RBI could factor in a rate hike in Aug’22 (as inflation in Jun’22 is likely to come above 7%) and even in October policy, and take it higher than pre-pandemic level by October to 5.5%.

"Our peak rate at the end of the cycle now has now a higher probability of a lower bound of 5.5% and a lower probability of going up to 5.75% depending on inflation trajectory," the report said.

This is purely data-dependent and subject to revisions, it added.

Our average inflation forecast for FY23 is 6.7% but our quarterly inflation numbers are slightly different from RBI, the report said.

The best thing is that the peak of inflation may have been reached at 7.8%, with a little bit of luck. The 10-year yield is also likely to be capped at 7.5%, assuming 5.5% as the peak repo rate, it stated.