A sharper-than-expected rise in retail inflation to a three-month high of 6.52% in January from 5.72% in December, driven by a big spike in prices of cereals and stickiness of “core inflation” has increased the chances of another round of rate hike by the Reserve Bank of India (RBI) in the current cycle. With core inflation expected to be stubborn in February and March as well, the repo rate, which was increased by 0.25% to 6.5% in the latest monetary policy review, may see a similar increase either in April review or later, analysts feel.
According to official data released on Monday, the inflation, measured by consumer price index (CPI), rose sharply in January from a one-year low in December, to breach the upper limit of RBI’s medium-term target of 2-6% again. The keenly watched number was below the limit in November and December, but was above the threshold in the previous 10 months.
With an adverse base effect in food inflation and largely unyielding core inflation, analysts had expected a marginal rise in headline inflation in January. Though one reason for the spike in annual “cereals and products” inflation to 16.12% in January from 13.79% in December is believed to be the withdrawal of additional food grains supplies under the PM Garib Kalyan Anna Yojana effective December 31, a steady rise in wheat prices since July, too, has stoked the consumer food price index and the broader CPI.
More worryingly, rural retail inflation outpaced the general index and was higher at 6.85% in January 2023 against 6% in urban areas. Prices of several items hardened – higher annual inflation rate was reported in January compared to December in components of core inflation namely “personal care and effects (9.57%), health (6.36%) and “prepared meals, snacks, sweets, etc.”, while slight declines were reported in “clothing and footwear” (9.08%), “household goods and services” (7.26%).
Indicating a broad-based hardening of prices, four of the six subgroups of the CPI basket – “food and beverages”, “clothing and footwear”, “fuel and light” and “miscellaneous” had inflation above 6% in January.
The retail inflation was at 6.01% in January 2022 and 5.66% in December 2021.
Food and consumer affairs minister Piyush Goyal on Monday asked state-owned Food Corporation of India to open more procurement centres covering all revenue districts in Uttar Pradesh for the benefit of farmers and also sell more wheat in open market to cool prices. With reports of heat conditions in several regions affecting the quality of standing wheat crops, the government is exploring options like imposing stock holding limit for wheat and releasing additional quantities of the grain over and above the 3 million tonne (mt) already approved for open market sale by FCI. It will also likely continue with the ban on wheat exports imposed last year till the end of the 2023-24 marketing season (April-June).
While noting that the policy repo rate increases undertaken since May 2022 are working their way through the system, the RBI had stressed in the latest policy review that, “it is imperative to remain alert on inflation so as to ensure that it remains within the tolerance band and progressively aligns with the target”.
Suvodeep Rakshit, senior economist, Kotak Institutional Equities, said: “The hawkish tone of the RBI in the February policy seems justified with both headline and core inflation (at 6.4% in January) remaining sticky and elevated. The RBI is unlikely to change its stance in the April policy, while a 25-basis point hike is a distinct possibility now (compared to a larger probability of pause earlier).”
However, India Ratings said it expects a pause in the policy rate in the near term. “Although we expect February 2023 headline retail inflation to remain around 6.5%, it is expected to moderate from March 2023,” said Sunil Kumar Sinha and Paras Jasrai of India Ratings.
The “food and beverages” sub group, which has a 45.86% weight in the combined CPI basket, registered a 6.19% inflation last month from 4.58% in December 2022. Vegetables continued to register deflation for the third straight month but it was lower at 11.7% in January compared to 15.08% in December. Prices of eggs, meat and fish, and milk also rose in January.
RBI governor Shaktikanta Das said on Saturday after the central bank board meeting, which was attended by finance minister Nirmala Sitharaman, that retail inflation could fall further from 5.3% projected for 2023-24 if crude prices remain benign. He said RBI has assumed crude price of $95/ barrel for its inflation projection for the next fiscal, while the average price this year has been $93/bbl. “The risks to inflation is evenly balanced in FY24,” he said.
Aditi Nayar, chief economist, head – Research & Outreach, Icra, said the broad-based sequential fall in prices of several food items in early February 2023 as well as a high base should dampen the year-on-year food inflation print for this month below 6%. “Besides, the 3.3% rise in acreage has brightened the rabi output prospects, amid early sowing, improved fertiliser availability and healthy reservoir storage, offering some relief,” she said, adding that the headline CPI inflation is projected to soften mildly to 6.3% in February 2023.
”The reason for (spurt in inflation) is that companies are still passing on higher input costs to the consumers. This will continue in the fourth quarter, too,” said Madan Sabnavis, chief economist, Bank of Baroda. He added that retail inflation is likely to remain elevated for the next two months too. “There is scope for the Union and state governments to consider action on the taxes front especially fuel to cool down inflation,” he said.
Before the January inflation data was out, most analysts expected the latest rate hike to be the terminal one in the current cycle and the Monetary Policy Committee to pause. However, if core inflation remains unyielding for a few more months, the repo rate could remain at 6.5% for longer, they had said. In fact, core inflation inched up to 6.1% in December from 6% in November, even as the price pressures measured by the consumer food price index saw a sharp sequential decline from 4.67% to 4.19%, enabled by a sharp deflation in vegetables.