RBI needs to hike key rate by at least 100 basis points to control inflation: CLSA

CLSA on Friday said that it expects India's inflation to average at 6.3 percent for the financial year 2023 and insisted on the need for the Reserve Bank of India to hike the key rate by at least 100 basis points. 100 basis points equal 1 percentage point.

“We are looking at an average inflation of 6.3 percent for the whole year, but the point is that it's not so much the risk of inflation... The problem is that the interest rates are so low that you are running negative real rate. So I would imagine that you need to hike at least 100 basis points more from an RBI perspective to go to somewhere around 5.4-5.5 percent,” Indranil Sengupta, Economist and Head of Research, CLSA India, told CNBC-TV18.

CLSA's estimated inflation number for FY23 in lower than the projection made by India Ratings and Research on Thursday. Ind-Ra said the average headline inflation is set to accelerate to a nine-year high at 6.9 percent in FY23 and added the RBI may go for more rate hikes during the fiscal.

RBI in April revised the inflation projection to 5.7 percent for 2022-23. It sees Q1 inflation at 6.3 percent, Q2 at 5.8 percent, Q3 at 5.4 percent and Q4 at 5.1 percent.

India's retail inflation last month hit an eight-year high of 7.79 percent owing to high food prices. Food inflation jumped to 8.38 percent in April against 7.68 percent in March and 1.96 percent in the same month last year.

This was the fourth straight month when the Consumer Price Index (CPI)-based inflation stayed above the central bank's comfort zone of 2-6 percent.

As the inflation remains high, experts and economists are expecting the RBI to tighten monetary policy aggressively.

Sengupta said this could impact GDP growth estimates. “I would say that there could be a bit of a downside bias (in GDP estimates) because history tells you that when the Fed starts to suck out liquidity, it becomes very difficult for commodity prices to sustain at high levels. And I think barring oil, most of the other commodity prices have certainly begun to come down," he said.

At this point, however, Sengupta is "not calling for a long recession".

“We are not calling for a long recession or anything. We are looking at a slowdown," he said, adding that India’s 10-year yields are unlikely to sustain above 7.5 percent.