Retail inflation based on the Consumer Price Index (CPI) surged to nearly 7 per cent, a 17-month high, in March. This has fuelled expectations of a policy rate hike as early as in June.

Retail inflation

Data released by the National Statistical Organisation showed that retail inflation jumped to 6.95 per cent as against 6.07 per cent in February, and 5.52 per cent in March last year. Most of the commodity groups touched multi-month highs -– cereals and products (19 months), milk and products (16 months), vegetable (16 months), clothing (100 months), footwear (111 months), household goods and services (102 months), personal care (13 months) and the food index (16 months).

A note prepared by Sunil Kumar Sinha and Paras Jasrai of India Ratings & Research (Ind-Ra), points out that the health and household goods/ services inflation is turning structural with health inflation in excess of 6 per cent in the last 15 months and household goods/ services inflation in excess of 5 per cent in the last 10 months. Going forward, with an increase in cost of essential medicines from April, health inflation is likely to exert further pressure on retail inflation.

Podcast | Retail inflation shoots up to 6.95% in March  Podcast | Retail inflation shoots up to 6.95% in March  

Swati Arora, Economist with HDFC Bank, feels it is important to note that the March CPI inflation print does not capture the entire burden of the increase in fuel prices as the prices were revised only in the fourth week. The full impact of the rise in fuel and LPG prices is likely to get reflected in April print, which could be closer to 7.3-7.5 per cent. Inflation is expected to average 6.5-6.7 per cent in H1 FY23.  “On the policy front, we expect the RBI to change its stance to neutral in its June policy and a possibility of a rate hike cannot be ruled,” she said.

Taking this forward, Aditi Nayar, Chief Economist with ICRA, expects that with the MPC having signalled an imminent stance change, the rate hike cycle may begin as early as June, if the next CPI inflation print does not significantly cool off from the March level. “We now expect to see a 50-75 bps of rate hikes by the end of Q2 FY2023, followed by a pause in H2 FY2023, and perhaps another 50 bps of hikes in FY2024,” she said.

Industrial growth

IIP in February grew by just 1.7 per cent despite a negative base of 3.2 per cent last February. At the broad-based level, manufacturing ouput, the largest component of IIP, grew at 0.8 per cent year-on-year (y-o-y) and mining and electricity at 4.5 per cent each y-o-y in February.

t Four of the six segments in the use-based classification, namely primary goods, capital goods, intermediate goods and infrastructure goods, witnessed positive growth in February 2022. The most notable was infrastructure goods, which grew at 9.4 per cent. However, both consumer durables and non-durables recorded a contraction of 8.2 per cent and 5.5 per cent in February respectively.

Director, Knight Frank India, Vivek Rathi, said the present print of IIP reflects a broad-based trend across segments, mainly in capital goods and consumer durables, and in the non-durables segment. “Developments in the geo-political scenario in the near future and capacity utilisation would be crucial, as the reflection of Omicron and the third wave wanes from the index,” he said.

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