Retail inflation may have touched 7.4-7.5% in April, say economists

Reserve Bank of India (RBI) governor Shaktikanta Das pointed towards elevated retail price inflation in April, but did not put a number to it.

However, economists believe that it may have been in the range of 7.4-7.5 per cent in April.

This, together with the fear that inflation rate may remain above six per cent in the current financial year, has prompted the monetary policy committee (MPC) to hike the policy rate along with cash reserve ratio (CRR). Pranjul Bhandari, HSBC chief economist, India, said near-term inflation such as the April print could be in the 7.5 per cent ballpark.

ICRA chief economist Aditi Nayar said, “Today’s surprise repo rate and CRR hikes are very well timed. Our own CPI inflation projection for April 2022 is an eye-watering 7.4 per cent.”

Bank of Baroda (BoB) chief economist expected the inflation rate to be above seven per cent in the month.

In his statement, Das said there was a spike in the headline CPI inflation in March, 2022 as anticipated in the April policy statement. “The print for April is also expected to be elevated,” he added.

Consumer price index (CPI)-based inflation rate rose to 6.95 per cent in March 2022 from 6.07 per cent in the previous month.

Das said the sharp acceleration in headline CPI inflation in March 2022 to 7 per cent was propelled, in particular, by food inflation. This was due to the impact of adverse spillovers from unprecedented high global food prices.

Food in flation jumped to 7.68 per cent in March from 5.85 per cent in the previous month. “Nine out of the 12 food subgroups registered an increase in inflation in March. High frequency price indicators for April indicate the persistence of food price pressures. 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,” the RBI governor said.

YES Bank chief economist Indranil Pan said the logical underpinning of the RBI hike is the rising concern on inflation — especially with regard to food. “Food inflation, more than the non-food inflation, can change inflation expectations in India drastically,” he said.

The governor pointed out that even as domestic supplies are healthy, high global wheat rates are affecting domestic prices while edible oil prices have increased due to the ban on exports from Indonesia.

He said food price indices of the Food and Agriculture Organisation (FAO) and the World Bank touched historical highs in March and remain elevated. Elevated feed costs are translating into escalation in poultry, milk and dairy product prices, he said. On the non-food front, the governor said international crude oil prices continue to hover above $100 per barrel and this is prompting pass-through to domestic pump prices.

The risks of unprecedented input cost pressures translating into yet another round of price increases for processed food, non-food manufactured products and services are now more potent than before. This could stre­ngthen corporate pricing power if margins get squeezed inordinately, Das said.

In fact, the CPI inflation rate remained above six per cent in the January-March quarter and there was expectation that it may be so in the following two quarters as well.

This may for the first time force RBI to explain to the government the reasons for breaching the upper tolerance level for three consecutive quarters. Also, it will discuss remedial measures that it proposes to take and the time period by when the rate will come below six per cent. In its April policy, the MPC projected inflation rate at 5.7 per cent for FY23 — with the first quarter rate at 6.3 per cent, the second quarter at 5.8 per cent, third quarter at 5.4 per cent and the fourth quarter at 5.1 per cent.

However, the RBI governor on Wedn­esday said the changing dynamics pose upside risks to the inflation trajectory set out in the MPC resolution of April 2022.

Nayar expected CPI inflation to average above six per cent in FY23 with the duration of the Russia-Ukraine war being the key factor. 

HSBC chief India economist Pranjul Bhandari said, HSBC’s projection is above 6.8 per cent for the year. Madan Sabnavis, chief economist, BoB, said, “Our CPI forecast is at 5.5-6 per cent, with a clear upward bias towards 6 per cent.”