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After two months of easing, retail inflation based on Consumer Price Index (CPI) breached the RBI’s upper tolerance level and surged to 6.5 per cent in January against 5.72 per cent of December.
A key reason for the rise is higher price of cereals combined with spices and other food products.
The targeted inflation range under Monetary Policy framework is 2-6 per cent with median rate of 4 per cent. With the inflation rate again breaching 6 per cent and core inflation remaining over 6 per cent, another round of policy interest rate hike cannot be ruled out. So far, MPC has effected rate hikes six times with a total of 250 basis points or 2.5 per cent which has impacted interest rate on loans as well as deposits.
During the month under consideration, rural retail inflation was at 6.85 per cent, while urban retail inflation was 6 per cent. These two rates in the month of December were 6.05 per cent and 5.39 per cent, respectively. Although inflation for vegetables continued to be in the negative territory (-11.7 per in January cent against -15.08 per cent in December), cereals and spices, etc pushed food inflation rate to 5.94 per cent against 4.19 per cent previously.
Rate hike on cards?
Sunil Kumar Sinha, Principal Economist with India Ratings and Research (Ind-Ra), said over the past few months, core inflation remained sticky and again came in at 6.1 per cent in January. When seen against the weak and uneven consumer demand, this suggests that the stickiness in the core inflation (After taking out volatile products such as food and fuel from overall inflation) is more a supply side issue. However, he said that with the softening of global commodity prices and normalisation of supply chains, hopefully the pricing power exercised by the manufacturing sector will wane.
“Although Ind-Ra expects Feb 2023 headline retail inflation to remain around 6.5%, it is expected to moderate from March 2023. Therefore, it expects a pause in the policy rate in the near term,” he said.
Aditi Nayar, Chief Economist, ICRA, said with the surge in January CPI inflation print, “we have revised our forecast for the Q4 FY2023 average CPI inflation to 6.2 per cent from 6 per cent, which exceeds the projection released last week by the MPC, suggesting that another rate hike may be in the offing in April 2023.”
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