India's retail inflation rises to three-month high of 6.52% in January

Higher food prices nudged up India's annual retail inflation in January to a three-month high of 6.52% from a 12-month low in December, showed government data on Monday. It was 5.72% in December and 6.01% in January 2022.

Inflation ran above the upper tolerance limit of 6% for the first 10 months of 2022 but fell below it in the last two, largely because of a fall in food inflation. Food price inflation, which accounts for nearly 40% of the CPI basket, rose to 5.94% in January from 4.19% in December. The prices of cereals and milk continued to rise. The previous high was 6.77% in October.

The retail inflation, measured by the annual change in the consumer price index (CPI), tracks the change in retail prices of goods and services, which households purchase for their daily consumption.

In the recent monetary policy announcement, Reserve Bank of India (RBI) Governor Shaktikanta Das said that in FY23, the inflation is expected to grow at 6.5%. In FY24, it is expected to fall to 5.3%. However, he noted that the inflation is still "sticky".

The Reserve Bank has been mandated by the central government to ensure the retail inflation remains at 4% with a margin of 2% on either side.

"CPI inflation for January is a negative surprise and will make the job of RBI's MPC (Monetary Policy Committee) more challenging. However, higher food prices will act as the tailwind for farmers and augurs well for rural demand, which has been languishing for many months.

"I expect the RBI to stay hawkish for a couple of more months before entering into a pause. Bond yields are expected to rise across all tenors but disproportionately more for the short-term instruments," Rupa Rege Nitsure, chief economist, L&T Financial Holdings told Reuters.

"The January inflation has surprised sharply on the upside. The previous softer readings were led by food prices and this reading has reversed the softness as cereals, milk and other protein-rich items continue to remain elevated.

"Besides, core inflation also remains elevated. Overall the readings are expected to unnerve the markets as the risk of more aggressive rate hikes. We now assign a high probability of 25 bps of rate hike April, with the scope for stance change shifted for future," Upasna Bhardwaj, chief economist, Kotak Mahindra Bank told Reuters.