With headline inflation accelerating to an eight-year high of 7.79 per cent in April, ratings agency Crisil said price rise is getting broad-based, and the Reserve Bank is likely to respond with rate hikes of up to 1 percentage point in FY23.
The research wing of the entity said it now expects the average consumer price inflation for FY23 to come at 6.3 per cent -- above the RBI's tolerance of 6 per cent -- as against 5.5 per cent recorded in FY22.
The RBI hiked its key rate by 0.40 per cent in a surprise move last week while keeping an accommodative stance. Analysts said the move had to be undertaken fearing a sharp spike in the April data.
"Inflation is set to become broad-based this fiscal, rising across food, fuel and core inflation....we expect the RBI to raise repo rates by another 0.75 per cent to 1 per cent in the rest of this fiscal," Crisil said.
Its analysts made it clear that the rate hikes will be ineffective in bringing down food or fuel inflation, but can help check a generalization in inflation by curbing the second-round effects.
The government "will need to pull its weight to control price rise", they said, admitting that it is a tradeoff where reducing taxes and subsidies will lead to added fiscal pressure.
The agency's peer India Ratings expects the RBI to hike the repo rate by up to 0.75 per cent in FY23 and also another 0.50 per cent hike in the cash reserve ratio.
The agency expects lower quantum of rate hikes despite expecting inflation print for FY23 to come in at a higher 7 per cent, and added that a peak will be achieved in September 2022.