Most of inflation due to Russia-Ukraine war, says State Bank of India

The report of the State Bank of India, Ecowrap, states that most of the increase in inflation is due to the Russia-Ukraine war and it is futile to blame central banks for it. Since February, food and beverages, fuel, and light and transport contributed 52 per cent of the overall increase in inflation.

The total impact of personal care and effects at all India level comes to 59% because of the war, as we add the impact of input costs particularly on the FMCG sector.

The report predicted that RBI will raise rates in June and August policy and take it to a pre-pandemic level of 5.15 per cent by August, despite the continued increase in inflation. It added that whether inflation will trade down because of the interest rates when the war continues, is still uncertain.

It pointed out that the question is if growth will be impacted due to high interest rates, especially at a time when the economy is recovering from the impact of COVID 19 on the economy.

We need to support RBI in its effort to quell inflation through hikes in interest rates. The report said that a higher interest rate will be positive for the financial system as risks will be repriced.

Indian inflation internals are much different from those of advanced economies such as the US. Building wage pressures mirrored in the multi-decadal high annual wage growth are fuelling broad-based price pressures across all advanced economies. In India, nominal rural wages for both agricultural and non-agricultural labourers picked up during H 2 FY 22, with the easing of restrictions imposed by states and the restoration of economic activity. The wage growth has remained soft. The weighted contribution of wage growth in the CPI build-up remains modest. It said that inflation will take time to moderate in India even after rate hikes.

It recommended the RBI to intervene in the NDF market instead of the onshore market through banks during the Indian time zone.