CPI inflation sticky at 6.44% in Feb, April rate hike near certain

Retail inflation, measured by the consumer price index (CPI), eased marginally in February but remained stubbornly above the 6% mark for the second straight month. Prices remained elevated across almost all categories, increasing chances of another rate hike by the Reserve Bank of India (RBI) in its April policy review.

Official data released on Monday revealed that retail inflation stood at 6.44% in February against 6.52% in January. It stood at 6.07% a year ago. Both food and core inflation remained sticky and elevated at over 6% last month and the price pressures were higher in rural areas than urban centres.

CPI inflation has remained above the RBI’s medium-term target of 6% for nine months this fiscal and had dipped marginally to below 6% only in November and December 2022. While it was expected to remain high in February this year, analysts are hopeful of some moderation from March as a favourable base effect kicks in.

Also Read

States’ subsidy bill outpaces capex  

The Fed’s interest rate strategy is getting tricky as plans to skip a hike emerge

Monsoon may reach Kerala coast in a couple of days

Govt working on incentives to push electric cooking

But as this is the last set of retail inflation data before the monetary policy committee meets in April, there now seems to be a greater possibility of a 25 basis point rate hike by the RBI, if not a sharper one. This is despite Goldman Sachs’ analysts on Sunday saying the US Federal Reserve may not deliver a rate hike at its March 22 in the light of the recent stress in the banking sector.

Madan Sabnavis, chief economist, Bank of Baroda, said retail inflation is likely to remain above 6% in March too. “There is a strong case for expecting RBI to increase repo rate in the April meeting by 25 basis points,” he said.

RBI has hiked rates by 250 basis points since May 2022 to keep inflation under check. The February hike in repo rate to 6.5% was initially seen to be the last in the current rate tightening cycle but retail inflation rate for the last two months has led to the expectation of another hike.

The impact of monetary policy is felt with a lag and monetary tightening of FY23 would push the inflation rate down, said Sunil Sinha and Paras Jasrai of India Ratings and Research. “However, stickiness of core inflation is turning out to be a major problem for the MPC. Core inflation in February 2023 has remained in excess of 6% for the last four months,” they said. India Ratings expects retail inflation in March at 5.7% due to the base effect leading to the fourth quarter retail inflation to be higher than 6%.

Suman Chowdhury, chief analytical officer, Acuité Ratings & Research, said the average headline inflation figure for Q4FY23, in all likelihood, is set to be higher than the RBI forecast of around 6.2%-6.4%.

Higher cereal prices drove food inflation in February, even as vegetable prices, which were a pain point earlier, remained in the deflationary zone. The food and beverages basket, which has a 45.9% weight in CPI inflation, saw further hardening and retail inflation in the category rose further to 6.26% in February from 6.19% in January.

While vegetables continued to register deflation at 11.61% for the fourth consecutive month in February, cereal inflation hardened further to 16.73% from 16.12% in January. This marked the sixth consecutive month of double-digit inflation in cereals.

The government has sold 2.8 million tonne of wheat in the open market from the FCI stock, which has helped to some extent but the heatwave could raise prices further. “The prevailing heat wave has cast a shadow on the prospects of wheat crop and we may expect shortfall, which will further exacerbate inflation,” Sabnavis said.

Aditi Nayar, chief economist, head – research & outreach, Icra, noted that while the correction in the prices of heavily weighted items in the CPI basket such as wheat, vegetables and edible oils augurs well for the food inflation print in the current month amidst a high base (CPI food inflation was 7.7% in March 2022), there are concerns around the impact of a likely heatwave on the wheat crop and the consequent impact on wheat prices in the near term.

“This along with the possibility of the occurrence of El Nino around the summer season and its impact on monsoons would play an important role in determining the trajectory of food inflation over the next few quarters,” she said.

Milk inflation is also turning into a concern, rising to 9.65% in February from 8.79% in the previous month. Inflation in fruits surged to 6.38% last month from 2.93% in January. However, inflation in most other food items, including spices (20.2%) and pulses (4.09%), eased in February.

Core inflation remained a concern, remaining at 6.1% in February, with a steady increase in prices of services and other items. While CPI inflation in four of the baskets, including clothing and footwear (8.79%), housing (4.83%), fuel and light (9.9%) and miscellaneous (6.12%), dipped marginally in February from January, it still remained high. Input costs in household goods and personal care products have pushed up prices in the miscellaneous category.

Rural inflation at 6.72% continued to outpace the general index as well as urban inflation at 6.1% in February due to the higher weightage of the food and beverages basket.

Rajani Sinha, chief economist, CareEdge, said CPI inflation is projected at 5.1% in FY24 due to combination of factors, including support from a high base, assumption of a normal monsoon, no major rebound in global commodity prices and some moderation in domestic growth.

Retail inflation in rural areas stood at 6.72% in February, while urban inflation was 6.1%.