The Reserve Bank of India (RBI), after an off-cycle monetary policy committee (MPC) meeting on May 2 and 4, said today that inflationary impulses with adverse global price shocks will give further rise to inflation. It also said that the global economic recovery is losing pace. In a key decision that sent the BSE Sensex crashing by 1,306.96 points, the central bank hiked key policy rates by 40 basis points with immediate effect and retained its accommodative stance.

In RBI's outlook for growth, governor Shaktikanta Das said even as the drivers of domestic economic activity are getting stronger, they face headwinds from global spillovers. As per the RBI, factors hurting the domestic recovery are geopolitical tensions, elevated commodity prices, Covid-19 curbs, slow external demand, and tightening global financial conditions on the back of monetary policy normalisation in advanced economies.

"In this high-voltage global environment, it is useful to take stock of the domestic macroeconomic and financial conditions. The rebound in domestic economic activity that took hold with the ebbing of the Omicron wave is turning out to be increasingly broad-based. Private consumption is regaining traction on the back of recuperating contact-intensive services and rising discretionary spending," Das says in his address.

On the high inflation, the RBI thinks high food price pressure will continue. Plus high fuel prices since March-end is pushing inflation further upward, he said. "The sharp acceleration in headline CPI inflation in March 2022 to 7% was propelled, in particular, by food inflation due to the impact of adverse spillovers from unprecedented high global food prices. Nine out of the twelve food sub-groups registered an increase in inflation in March. High-frequency price indicators for April indicate the persistence of food price pressures."

India's retail inflation, driven by high food prices, also jumped to 6.95% in March 2022, which was the highest in around one and a half years. It was also the third month that inflation has surged beyond the RBI's tolerance threshold of 6%.

The RBI thinks food inflation pressures will continue in the coming months as well. "Simultaneously, the direct impact of the increases in domestic pump prices of petroleum products — beginning the second fortnight of March — is feeding into core inflation prints and is expected to have intensified in April."

Notably, the food price indices of the Food and Agriculture Organisation (FAO) and the World Bank touched historical highs in March and remain elevated. Spillovers from global wheat shortages are impacting domestic prices, even though domestic supply is comfortable. Prices of edible oils are expected to firm up further due to export restrictions by key producing countries and the loss of sunflower oil output due to the war.

High feed costs are also translating into escalation in poultry, milk and dairy product prices. Global crude oil prices continue to hover above $100 per barrel, thereby posing risks to input cost pressures. This could lead to "another round of price increases for processed food, non-food manufactured products and services".

The RBI said the strengthening of inflationary impulses, in sync with the persistence of adverse global price shocks, pose “upward risks” to the inflation trajectory presented in the April MPC resolution. It said in this situation, it's necessary for monetary policy to focus on the withdrawal of accommodation, it said.

Notably, in response to the pandemic, the MPC had adopted an ultra-accommodative mode by reducing the repo rate by 75 basis points on March 27, 2020, followed by another reduction of 40 basis points on May 22, 2020.

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