India's retail inflation, as measured by the consumer price index (CPI), rose 16-month high to 6.95 per cent in the month of March, breaching the upper limit of the Reserve Bank of India's (RBI's) target range for the third consecutive time, according to data released by the Ministry of Statistics and Program Implementation on Tuesday. The surge is partly due to a sustained rise in food prices.
The RBI has been mandated by the government to keep retail inflation at 4 per cent with a margin of 2 per cent on either side.
The CPI-based inflation stood at 6.07 per cent in February and 6.01 per cent in January. The inflation rate in same month last year was 4.3 per cent.
The inflation in the food basket was 7.68 per cent in March, up from 5.85 per cent in the preceding month.
The full effect of the spike in crude oil and global energy prices following Russia's invasion of Ukraine in late February is not expected to appear in consumer prices until April as the pass-through to consumers at fuel pumps was delayed.
Food prices, which account for nearly half the inflation basket, are also expected to remain elevated as supply chain problems related to the Russia-Ukraine war disrupt global grain production, supply of edible oils and fertiliser exports.
Prices of palm oil, the world's most widely used vegetable oil, surged nearly 50 per cent this year. Food price rises are sharply felt by millions living below the poverty line who have already taken a hit on jobs and incomes due to the pandemic.
Moreover, unlike major central banks which are faced with inflation rates at multi-decade highs, the RBI has opted to leave interest rates steady even as inflation has crept well above its target and shows no signs of abating any time soon.
The RBI again left its key repo rate unchanged at a record low of 4 per cent on its the bi-monthly monetary policy on Friday. But analysts are beginning to show concern that the right time to have begun raising interest rates may have already passed.
"With the MPC (Monetary Policy Committee) having signalled an imminent stance change, the rate hike cycle may begin as early as June 2022, if the next CPI inflation print doesn't significantly cool off from the March 2022 level. We now expect to see 50-75 bps of rate hikes by the end of Q2 FY2023, followed by a pause in the second half of FY2023, and perhaps another 50 bps of hikes in FY2024," said Aditi Nayar, Chief Economist, Icra, adding, "With the CPI inflation surging in March 2022, we expect the 10-year G-sec yield to cross 7.2% imminently. With dimming hopes of early bond index inclusion, the 10-year G-sec yield could test 7.5% in H1 FY2023."
Further, Garima Kapoor, Economist - Institutional Equities, Elara Capital, added, "Amid hardening of food prices owing to disrupted global supply chains and tight domestic agriculture commodity market, India's retail CPI inflation rose to 17-month high of 6.95%, probably explaining the sharp hawkish pivot of RBI in recent policy. Today's print will likely hasten the process of monetary policy normalisation. We expect repo rate hike starting August 2022."