Retail inflation drops to 6.44%, but still above RBI upper band

Core inflation — non-food, non-fuel component — continued to remain above 6 per cent mark for the fourth consecutive month, prompting expectations of another rate hike of 25 basis points by the RBI in its upcoming policy review in April. Also, even as rural inflation inched lower to 6.72 per cent in February from 6.85 per cent a month ago, it continued to remain above urban inflation, which rose to 6.10 per cent from 6 per cent.

Experts said an inflation print above 6 per cent level for the second straight month indicates a lag in the impact of monetary policy, under which the RBI has increased the repo rate by a cumulative 250 basis points to 6.50 per cent since May last year. They, however, said the headline inflation print is expected to ease March onwards due to a significant base effect.

Retail inflation based on the Combined Price Index (Combined) had risen to a three-month high of 6.52 per cent in January this year. It stood at 6.07 per cent in February 2022, then rose to 6.95 per cent in March 2022 and further to 7.79 per cent in April 2022.

Among the sub-groups, while vegetables continued to remain in deflationary mode for the fourth consecutive month at (-)11.61 per cent in February, cereals inflation increased to 16.73 per cent in February, the sixth consecutive month of double-digit inflation. Inflation rate for milk and products increased to 9.65 per cent in February from 8.79 per cent a month ago, while that for fruits rose to 6.38 per cent from 2.93 per cent a month ago.

Inflation rate for meat and fish eased to 3.39 per cent in February from 6.04 per cent a month ago, while that for egg eased to 4.32 per cent from 8.78 per cent. Clothing and footwear inflation eased to 8.79 per cent in February from 9.08 per cent a month ago, while fuel and light inflation rate moderated to 9.9 per cent from 10.84 per cent.

“Second consecutive month of more than 6% inflation makes the monetary authority’s job difficult. Impact of monetary policy is felt with a lag and monetary tightening of FY23 would push the inflation rate down. However, the stickiness of core inflation is turning out to be a major problem for the monetary policy committee… price trends and indicators available at present are making the monetary policy committee’s job difficult. However, India Ratings believes the odds are more in favour of another 25 bps repo rate hike in April 2023 monetary policy. India Ratings expect March 2023 retail inflation to be 5.7% leading to 4QFY23 retail inflation to be higher than 6%, five consecutive quarters of more than 6% inflation,” Sunil Kumar Sinha, Principal Economist, India Ratings said.

Though the government’s measures to cool off wheat inflation through open market sales in February and reduction in reserve price is likely to show an impact on inflation with a lag, sticky core inflation and onset of summer may push up perishable products prices higher, experts said. Also, higher prices of milk and prepared meals are a cause of concern.

“There is concern on milk inflation at 9.7%. The prices have been raised often this year – at least 3 times to adjust for higher fodder costs. These prices will never come down. Spices inflation has peaked at 20% which though has a small share in the basket is significant in terms of reflecting demand-supply mismatches. Prepared meals/foods have witnessed inflation of 8% as costs have been passed on. Here it should be remembered that prices are seldom reduced even when costs come down,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.

Experts also said that with risks tilted towards another rate hike going ahead, there should be further concerns on the growth front for the policymakers. “For now, we do not see any evidence of the financial stability risks emanating from the US destabilising India’s monetary policy path, although we need to watch these events carefully. The Q4 GDP growth number was also broadly in line with the RBI’s projections, suggesting that the central bank should have few concerns about growth risks. We expect a 25 bps hike in April, albeit with continued dissent among the MPC members. For March, we track headline CPI around 5.5% YoY for now, although the risks to the print remain skewed to the upside, in our view,” Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said.

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In its latest monetary policy on February 8, the RBI had hiked the repo rate by 25 basis points. It had said that the outlook for inflation is mixed, projecting inflation at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent. “While prospects for the rabi crop have improved, especially for wheat and oilseeds, risks from adverse weather events remain. The global commodity price outlook, including crude oil, is subject to uncertainties on demand prospects as well as from risks of supply disruptions due to geopolitical tensions. Commodity prices are expected to face upward pressures with the easing of COVID-related mobility restrictions in some parts of the world. The ongoing pass-through of input costs to output prices, especially in services, could continue to exert pressures on core inflation,” it had said.