India’s CPI inflation took a spooky U-turn in January, jumping to a 3-month high of 6.52% after falling for three months in a row, and breaching the Reserve Bank of India’s (RBI) tolerance range. The spike in retail inflation in January was mainly due to a spike in food prices, according to the Ministry of Statistics and Programme Implementation report, published on Monday. In the earlier months, the inflation rate based on the Consumer Price Index (CPI) stood at 5.72% in December and 6.01%in January 2022. In the latest reading, the inflation rate for the food basket was at 5.94% in January, up from 4.19% in December. The previous high was 6.77% in October. The Reserve Bank has been mandated by the central government to ensure that retail inflation remains at 4% with a margin of 2% on either side.
RBI’s Monetary Policy Committee last week hiked the repo rate by 25 basis points, taking the key interest rate to 6.5%. That was expected. However, in a surprise, the MPC kept the door open for more tightening in the current cycle, instead of a decisive pause. “Remaining focused on the withdrawal of accommodation and keeping a close watch on inflation, the MPC has announced a rate hike of 25 bps. On the back of strong macroeconomic fundamentals and retail inflation being under control, we could be at the end of the rate hike cycle. However, given global risks and elevated core inflation, the RBI will likely focus on data while taking its next action,” Ravi Subramanian, MD & CEO of Shriram Housing Finance Ltd had said after RBI announced its decision to hike rates.
“The spike in Jan 2023 headline inflation was led by surge in food prices, primarily cereals. Inflationary pressure in Jan 2023 was witnessed across non-food categories as well… Overall increase in prices has caused shrinkage in disposable incomes of the households which could impact their purchasing capacity. Lenders may also take an adverse view of the loan repayment capacity of borrowers,” said Vivek Rathi, Director-Research, Knight Frank India.
He believes that in coming months, a revival in the service sector which could potentially boost demand would further add to inflationary pressure, especially in the core categories. “As inflationary pressure continues to sustain, in our view, the RBI