Feb CPI inflation stubborn at 6.44%, cereals, milk continue to play villains; price rise above RBI tolerance

CPI inflation in February remained stubborn, printing at 6.44 per cent, as milk and cereal prices continued to play spoilsport. February retail inflation fell marginally from January’s 6.52%, but was way above RBI’s tolerance limit of 6%. It beat a Bloomberg poll estimate of 6.4%. Earlier today, a Bloomberg report had said that February inflation, likely breaching the RBI’s target for a second straight month, may prompt the Monetary Policy Committee to weigh an increase in borrowing costs to the highest level in seven years.

“Cereals and milk inflation continues to be high while fruits inflation spiked up too in February. However, we see food inflation softening in March based on recent price trends. Core inflation at 6.1 per cent remains elevated and sticky with relatively high inflation across clothing and footwear, health, personal care and effects, and household goods/services,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

The data released by the Ministry of Statistics and Programme Implementation’s National Statistical Office showed that the rural retail inflation was at 6.72 per cent in February as against 6.65 per cent in January, while the urban inflation was 6.10 per cent in February as against 4.79 per cent in January 2023. On a combined basis, the inflation in cereals and products was at 16.73 per cent, while that for milk and milk products remained at 9.65 per cent.

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The retail inflation for food and beverages was at 6.26 per cent as against 6.19 per cent in January; and for clothing and footwear, it dropped to 8.79 per cent in comparison to 9.08 per cent in January. Housing inflation was at 4.83 per cent in February and fuel and light dropped to 9.90 per cent as compared to 10.84 per cent the previous month. Inflation in the food basket was at 5.95 per cent, up from 5.94 percent in January. The food basket has a weightage of 39.06 per cent in the overall CPI.

“Inflation came in higher than expected, led by higher food inflation – particularly cereals and milk inflation. The risk to inflation is tilted towards the upside with El-Nino conditions predicted in 2023. The still sticky core provides little leg room for absorbing any spikes in food inflation that might develop in the coming months,” Sakshi Gupta, Principal Economist, HDFC Bank (Gurugram), told Reuters.

How will inflation affect RBI’s next course of action?

With price pressures resurfacing after easing below 6 per cent in the last two months of 2022 might lead to RBI raising the repo rate next month on 6 April. “The RBI will remain hawkish in the April policy as inflation prints have spiked back over 6 per cent in January-February along with core inflation remaining sticky above 6 per cent. We continue to expect a 25 bps repo rate hike in the April policy,” said Suvodeep Rakshit.

Kotak Mahindra Bank’s Chief Economist Upasna Bhardwaj said that even as the global financial instability has reduced the probability of a 50 basis points (bps) hike by the US Federal Reserve, February inflation rate will keep the MPC cautious. “We expect the higher-than-6 per cent inflation to keep the MPC cautious and hike the repo rate by 25 bps in the upcoming April policy,” Upasna Bhardwaj told Reuters.

“This print strengthens the case for another 25 bps rate hike by the RBI in the next policy with an increasing possibility that further rate hikes post April cannot be ruled out now,” Sakshi Gupta said. The repo rate currently stands at 6.50 per cent. The RBI is expected to keep inflation within the 2-6 per cent band.