RBI may have to hike interest rates to curb rising inflation

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As retail inflation measured by the Consumer Price Index rose to 6.30 per cent in May compared to 4.23 per cent recorded in April, analysts said that the Reserve Bank of India may be forced to increase interest rates as it is significantly higher than the central bank’s inflation target of 4 per cent with a 2 percentage point margin provided on either side.</p>
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Until supply chain disruption, caused by the Covid 19-induced localised lockdowns, are managed and addressed immediately, the RBI would be forced to increase interest rates or change its stance to combat inflation.</p>
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A State Bank of India (SBI) analysis said that otherwise RBI runs the risk of being seen as a mute spectator which in turn would impair its credibility in fighting inflation.</p>
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The analysis said that in the coming months, domestic inflation trends are likely to raise anxiety levels in the RBI and the monetary policy committee (MPC). “Driven by several global and domestic factors, inflation may remain elevated in the coming months,” the analysis said.</p>
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SBI also said that specifically, the faster than anticipated and robust recovery in some of the advanced countries is likely to exert upward pressure on international commodity prices, including oil. “The latter being an intermediate good in leading emerging economies, it would generate cost push inflation,” it said, adding that the second wave of the Covid 19 pandemic which led to localised lockdowns disrupted supply chains even in rural areas. This will manifest in rising prices on essentials. </p>