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The economy on Friday got a dose of bad news with retail inflation surging to a three-month high of over 5 per cent in February and industrial growth back in contraction mode during January.
The surge in inflation means the RBI’s Monetary Policy Committee (MPC) is likely to remain on pause mode on the policy interest rate when it meets next month.
February’s retail inflation based on the Consumer Price Index (CPI) jumped nearly 1 percentage point to 5.03 per cent from 4.06 per cent in January. Pricier food, transportation and communication, and clothing and footwear led the jump in headline number.
The core inflation hardened to a three-month high of 5.7 per cent in February 2021 from 5.5 per cent in the corresponding previous month, under-scoring that an uptick in commodity prices, rising demand, and emerging pricing power will keep inflationary pressures intact.
Higher fuel prices
According to Aditi Nayar, Principal Economist with ICRA, while the first-round impact of higher fuel prices on the CPI inflation is limited, the second-round impact is substantially larger.
Inflationary pressures
Unless taxes on fuels are cut sizeably, inflationary pressures are likely to rule out further rate cuts.
“We expect the CPI inflation to rise further in March, before recording a base-effect led dip in April reflecting the impact of the spike in inflation during the lockdown.
“We continue to expect a status quo on the repo rate through 2021, with a rapidly dimming likelihood of an early change in stance from accommodative to neutral,” she said.
Industrial front
The bad news spilled over to industrial front with the Index of Industrial Production (IIP) slipping to (-)1.6 per cent in January against 1.6 per cent in December.
Manufacturing declined 2 per cent in January while capital good sector reported a contraction of 9.6 per cent. This shows fresh investment is not picking up. Now, experts feel that with better expenditure during the January-March quarter, there will be some improvement, but the overall contraction is expected to continue in February.
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