Opinion Express View on the surprising rise in inflation

In its last meeting, held just a few days after the Union budget, the monetary policy committee of the RBI had voted to raise the benchmark repo rate by 25 basis points. The decision of the committee was, however, not unanimous as two members, Jayanth Varma and Ashima Goyal, voted against the hike. Yet despite this dissent within the committee, the tone of the policy statement was markedly hawkish. The MPC noted that calibrated action was warranted to break the persistence in core inflation. As per the detailed minutes of the MPC meeting released on Wednesday, the members who had voted in favour of the rate hike felt that it was premature to pause at this juncture. This suggests that despite expectations that the MPC had neared the end of the rate hike cycle, it is perhaps not done hiking rates.

Inflation data for January, released just a few days after the MPC meeting had concluded, seems to justify the hawkishness. Retail inflation, as measured by the consumer price index, rose to 6.52 per cent in January, up from 5.72 per cent in December, reversing the declining trend seen in the preceding months. Much of the surge was driven by food inflation — the consumer food price index rose to 5.94 per cent, up from 4.19 the month before, driven largely by cereals. Equally worrying, core inflation has continued to remain sticky. Inflation remained elevated in clothing and footwear, household goods and services, personal care effects and education, signalling that price pressures remain fairly broad-based across the economy. This surprise uptick in inflation is likely to complicate the policy choices before the MPC members when it meets next in the first week of April.

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As monetary policy acts with a lag, Varma and Goyal have advocated for pausing at this moment to observe the full impact of the policy tightening so far on the economy before taking any further action. Cumulatively, the MPC has tightened rates by 250 basis points since the beginning of this rate hike cycle. However, with some analysts now expecting inflation to remain above the 6 per cent upper threshold of the RBI’s inflation targeting framework in February as well, the hawks, who are looking for signs of a definitive decline in inflation, are likely to gain an upper hand. Some analysts are now penciling in a rate hike in the next policy meeting as well.