Economy: Higher oil prices in H1CY22 (and lower in H2) to bring forward India's rate hikes

• Headline US inflation, using both the PCE and CPI gauges, reached 40-year highs in Jan'22 (6.1% and 7.5% respectively) while core PCE inflation (the FOMC's preferred target) surged to 5.2%, the highest since April 1983. The US Federal Reserve needs to aggressively tighten monetary policy to contain the inflationary surge: US M2 growth has averaged 18.7% YoY in Mar'20-Jan'22, far faster than average US M2 growth of 6.8% YoY in the 60 years prior to the pandemic. Rolling back this extraordinary monetary accommodation will require 6 rate hikes this year of 25bp each (and one of 12.5bp) in our view, taking the Fed Funds rate to 1.75% by the end of 2022. Another 4 rate hikes in 2023 should take the Fed Funds rate to 2.75%, thereby restoring a slightly-positive real policy rate in the US.
• India had no extraordinary monetary accommodation during the pandemic: India's M3 growth of 11.3% YoY in Mar'20-Jan'22 was much lower than the 28-year pre-pandemic average M3 growth of 15.4% YoY. So there is little need for a roll-back of broad-money growth in India. Brent crude prices are uncorrelated with headline CPI inflation in India (because fuel & light have only a 6.84% weightage in the CPI), but a generalised surge in commodity prices will likely keep India's CPI inflation above 6% YoY in Mar-Apr'22, nudging the RBI to raise the repo rate by 50bp in Apr-Jul'22.
• With Brent already above US$60/bbl for the past 55 weeks, US shale-oil output is likely to rise sharply in the next half year, helping to replace most of the 1.5mmbd of Russian oil exports likely to be disrupted in the near term by the financial sanctions on Russia (which have not directly targeted Russia's energy exports). Brent is likely to settle closer to US$60/bbl in H2 CY22, and India's headline CPI inflation will likely settle in the 4-5% YoY range (in response to the earlier rate hikes), obviating the need for further rate hikes in H2 CY22. As an alternate supplier of steel, aluminium and foodgrain, India's exports stand to gain from the disruptions to Russian supply.

Source : Equity Bulls

Keywords

Inflation CPI HigherOilPrices ICICISecurities Economy