India’s retail inflation rate marginally dropped in February but remained comfortably above the Reserve Bank of India’s upper tolerance limit of 6 percent for the second consecutive month in 2023, largely driven by cereals and even more by milk prices. The annual retail inflation rate rose to 6.44 percent in February, slightly lower than 6.52 percent reported in January, government data showed on Monday. But the numbers came above the CNBC-TV18 poll estimate of 6.29 percent.
"Yesterday’s CPI numbers were on expected lines. April will be a serious dilemma for the RBI, so it should keep the stance hawkish rather than going for a rate hike in the next meet," said SBI group chief economic adviser Soumya Kanti Ghosh. "March and April inflation numbers will be significantly benign. RBI will have two numbers before June to decide on interest rates.”
The last inflation data reported below RBI’s medium-term target of 4 percent was in November 2021. Since then, prices have been rising and it is now more than three-fold of the RBI’s lower tolerance level of 2 percent.
RBI rate hike in April inevitable?
Stubbornly high inflation, which has been comfortably above RBI’s 2-6 percent target band could now force the central bank to keep raising the repo rate in the coming months with most economists saying that a hike in April is a done deal.
"February CPI inflation at 6.44 percent while elevated is broadly in line with expectations. Cereals and milk inflation continue to be high while fruits inflation spiked up too in February,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.
"The RBI will remain hawkish in the April policy as inflation prints have spiked back over 6 percent in January-February along with core inflation remaining sticky above 6 percent. We continue to expect a 25 basis points (bps) repo rate hike in the April policy."
The RBI hiked the repo rate by 25 bps to 6.5 percent in the February monetary policy meeting and lowered the consumer inflation projection for the year ending March 2023 by 20 bps to 6.5 percent, assuming crude oil to average at $95 a barrel.
The probability of more rate hikes now seems to be higher and interest rates could touch 7 percent much sooner than later.
Core inflation
Core inflation in February was nearly flat at 6.1 percent compared with January and was slightly higher than the poll estimate of 6.05 percent.
Food prices, which account for nearly 40 percent of the CPI basket, rose 5.95 percent in February, compared with 5.94 percent in January, even as edible oil and vegetable prices eased.
The index for fruits was up 3.3 percent sequentially and cereals posted an increase of 0.9 percent following a 2.6 percent rise in January.
The global context: Inflation on the rise
India is not the only country facing red-hot inflation. Both sides of the Atlantic, the US, Europe and the UK are battling the wrath of high price pressures.
Central banks across the world are tightening policy but with global growth slowing and the recent banking system collapse in the US, a high inflation rate can be a bigger challenge to deal with for world leaders, especially if it originates from the supply side.
The world will keep an eye on US consumer prices data releasing today that will possibly decide whether or not the Federal Reserve will hike interest rates again next week after the failure of two regional banks.
“There is some concern on banks right now, 25 more banks, may be on the radar and there is a problem about the insecurity of deposits in the US banks," said Steve Englander, Global Head of G10 FX Research of Standard Chartered Bank.
"Sentiments have deteriorated a lot but we still expect the Fed to raise rates by 25 bps in the next meet. All central banks in the emerging market will have to face the pressure from that."
First Published: Mar 14, 2023 11:38 AM IST
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