Faced with elevated retail inflation in August, the Reserve Bank of India is expected to raise interest rates in the range of 35-50 basis points in its next monetary policy committee meeting, said SBI Research.

“We believe the RBI is likely to raise rates in September policy and it could be a close call between 35 and 50 basis points,” it said. As per schedule, the next three-day monetary policy meeting will be held during September 28-30.

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In line with the global trend of monetary policy tightening to cool off inflation, the RBI has so far hiked the key repo rates — the rate at which the central bank of a country lends money to commercial banks — by 140 basis points in three tranches to 5.40 per cent.

“Beyond September, we are penciling in a minimal and token rate increase as inflation is likely to fall in a jiffy in H2FY23 (October-March),” the report authored by SBI’s Group Chief Economic Adviser Soumya Kanti Ghosh said.

India’s retail inflation rose to 7 per cent in August from 6.71 per cent the previous month due to a sharp rise in food prices, as per the government data released on Monday.

Retail inflation exceeded the Reserve Bank of India’s tolerance band for the eighth consecutive month.

The RBI is mandated to keep inflation in a range of 2-6 per cent. The RBI is deemed to have failed in its mandate if the average inflation remains outside the 2-6 per cent band for three consecutive quarters.

“The prices of cereal have moved higher despite consecutive fall in cereal prices in international markets. Spatial variation in rains and acreages across crop segments has affected the prices movements,” SBI Research said.

An analysis by SBI Research showed that out of 299 commodities in the CPI basket, 171 are categorized as supply driven, 99 as demand-driven and 29 are neutral.

“Our results show that supply side factors were responsible for 65 per cent of CPI inflation in May had dropped to 58 per cent in July but has increased to 61 per cent in August possibly reflecting the increase in unseasonal rains.”

Demand factors, it said, continued to remain range bound and the contribution of demand seemed to have slowed down in August, though marginally.

Against that backdrop, SBI Research said the jump in inflation in India continues to be a by-product of supply disruptions. 

(with inputs from ANI)