 "Retail inflation above 6% in February, may trigger another rate hike")
The retail inflation rate in February, while declining marginally, remained above the central bank’s upper tolerance limit of 6 per cent for a second consecutive month, leading analysts to predict another rate hike by 25 basis points by the Monetary Policy Committee (MPC) in its upcoming April meeting.
The data, released by the National Statistical Office on Monday, showed the consumer price index-based (CPI-based) inflation rate declined to 6.44 per cent in February from 6.52 per cent in January, with easing pricing pressure from food items such as meat, fish, eggs, and pulses as well as fuel and light.
However, prices continued to accelerate in cereals (16.73 per cent), milk (9.65 per cent), fruit (6.38 per cent), and housing (4.83 per cent).
Food inflation excluding processed food products eased to 5.95 per cent in February from 6 per cent in January.
Core inflation, which excludes food and fuel, remained above the 6 per cent mark.
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Madan Sabanvis, chief economist at Bank of Baroda, said the prevailing heat wave had cast a shadow on the prospects of the wheat crop, which might result in a shortfall in output, leading to further price pressure.
Aditi Nayar, chief economist at ICRA Ratings, said, along with the heat wave, the possibility of the occurrence of the El Nino around the summer season and its impact on monsoon would play an important role in determining the trajectory of food inflation over the next few quarters.
In 12 of the 14 months since January 2022, the retail inflation rate has remained above the upper limit of the Reserve Bank of India’s (RBI’s) tolerance band. The latest spike above the 6 per cent mark comes as a surprise as the RBI in its last meeting in early February had revised downward its January-March quarter retail inflation forecast by 20 basis points (bps) to 5.7 per cent.
The central bank’s MPC has so far hiked the repo rate by 250 basis points since May 2022, while cautioning that further calibrated monetary policy action is required to keep inflation expectations anchored, break the persistence of core inflation, and strengthen the medium-term growth prospects.
Rajani Sinha, chief economist at CARE Ratings, said with core inflation still high, the possibility of another 25-basis point hike in April cannot be ruled out.
Nayar agreed, even though she expects retail inflation to soften in March, basing herself on the early trends in the prices of food items and a high base.
“The MPC may go in for another rate hike, although the decision is likely to be non-unanimous, based on the minutes of the last review. Moreover, global developments over the next three weeks could impact the MPC’s decision,” she added.
Sinha expects the average CPI inflation rate at 5.1 per cent due to factors including support from a high base, the assumption of a normal monsoon, no major rebound in global commodity prices, and some moderation in domestic growth.