Analysts see another 25 bps rate hike as Jan’s CPI inflation breaches RBI’s tolerance limit

CPI inflation rose to 6.52 per cent in January from 5.72 per cent in December as prices of goods including food and beverage, and services increased.

The RBI last week in its monetary policy meeting increased the repo rate by 25 basis points or bps to a four-year high of 6.5 per cent.

Written by: Anjaly Raj

4 min readNew DelhiFeb 14, 2023 06:03 PM IST First published on: Feb 14, 2023 at 06:01 PM IST

Analysts expect another 25 basis points repo rate hike by the central bank’s Monetary Policy Committee (MPC) in April as India’s headline retail inflation in January jumped to a three-month high of 6.52 per cent.

India’s Consumer Price Index (CPI) based inflation rose to 6.52 per cent in January from 5.72 per cent in December as prices of goods including food and beverage, and services increased, the government data showed on Monday.

“Headline inflation at 6.5 per cent is a shocker. CPI inflation came in substantially higher,” Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services (MOFSL) said.

Gupta added, “January 2023 inflation figure was a shocker. After yesterday’s data, one cannot rule out another 25 bps rate hike in April 2023.”

The RBI last week in its monetary policy meeting increased the repo rate by 25 basis points or bps to a four-year high of 6.5 per cent. The rate hike by the RBI was the sixth consecutive hike since May 2022 as the central bank has increased the key lending rate by a cumulative 250 bps to 6.50 per cent since then.

The repo rate is the rate at which the central bank lends funds to banks.

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The RBI’s MPC retained its stance on ‘withdrawal of accommodation’ to ensure that inflation remains within the target going forward, while supporting growth.

However, the headline inflation at 6.52 per cent in January breached the RBI’s upper tolerance limit of 6 per cent.

Nish Bhatt, Founder and CEO at Millwood Kane International, said, “The sudden spike in the inflation numbers, when the central bank was showing signs of comfort with the inflation trend is likely to have a bearing on the rate action.”

“If the inflation stays elevated for another month or two, it will have a negative impact in the form of another rate hike in April and further liquidity tightening,” Bhatt added.

While CPI inflation rose to a three-month high in January, the wholesale price-index (WPI) based inflation in the same month cooled down to a 24-month low of 4.73 per cent., the commerce ministry’s data showed on Tuesday.

“After multiple months of double-digit and elevated inflation, the WPI (inflation) eased to relief. The ease in WPI inflation will have a positive impact on industrial product prices,” said, Raheel Shah, Director at BDR Pharmaceuticals.

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Shah, however, added, “The concern is that while WPI is easing, the CPI data released last evening stood at a 3-month high. Both the retail as well as wholesale inflation must fall consistently and be steady in a range for policymakers to take notice and change their views and soften their policy stance and view on rates.”

Seshadri Sen, Head of Research at Alchemy Capital Management said, “An anomaly on cereal inflation may have overstated the headline number by ~25bps. The high inflation print could drive another RBI rate hike in their April 2023 MPC meeting.”

“This does not impact our positive view of the economy. Inflation risks are receding, this negative reading notwithstanding,” Sen added.

Sen said, “Interest rates should peak in CY23, at levels well below previous highs. India is in the middle of a multi-year growth cycle, helped by strong demographics, financial stability, and a capex recovery.”