Retail inflation in February remained above the central bank’s upper tolerance limit of six per cent for the second straight month, despite declining marginally from the previous month’s level, prompting analysts to predict another rate hike by 25 basis points by the Monetary Policy Committee (MPC) in its April meeting.
Data released by the National Statistical Office on Monday showed that the Consumer Price Index (CPI)-based inflation rate declined marginally to 6.44 per cent in February from 6.52 per cent in January, with pricing pressure easing in food items such as meat, fish, egg and pulses and in fuel and light. However, prices continued to accelerate in cereals (16.73 per cent), milk (9.65 per cent), fruits (6.38 per cent) and housing (4.83 per cent).
Food inflation excluding that of processed food products eased to 5.95 per cent in February from six per cent in January. Core inflation, which excludes the volatile food and fuel prices, remained sticky above the six per cent mark.
Madan Sabanvis, chief economist at Bank of Baroda says the prevailing heat wave has cast a shadow on the prospects of wheat crop, which may result in a shortfall in output leading to further inflation.
Aditi Nayar, chief economist at Icra Ratings says that along with the heat wave, the possibility of El Nino occuring around the summer season and its impact on monsoon would play a key role in determining the trajectory of food inflation over the next few quarters.
In 12 of the 14 months since January 2022, retail inflation has remained above RBI’s upper tolerance band. The latest spike above the 6 per cent mark comes as a surprise, as RBI had, in its last meeting in early February, revised its January-March quarter retail inflation forecast down by 20 basis points (bps) to 5.7 per cent.
The MPC has so far hiked the repo rate by another 250 bps, while cautioning that further calibrated monetary policy action is warranted to keep inflation expectations anchored, break the persistence of core inflation, and strengthen medium-term growth prospects.
Rajani Sinha, chief economist at CARE Ratings says that with core inflation still high, the possibility of another 25-bps rate hike by RBI in the April meeting cannot be ruled out.
Nayar agreed, even though she expects retail inflation to soften in March based on early trends in food prices and a high base. “Given two straight CPI inflation prints above six per cent, the MPC may go in for another rate hike, though 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 said.
Sinha sees average CPI inflation at 5.1 per cent due to a combination of factors such as support from a high base, assumption of a normal monsoon, no major rebound in global commodity prices and some moderation in domestic growth.