Friday May 13, 2022

Retail inflation beat analysts’ expectations and surged to a 95-month high of 7.79% in April on a broad-based rise in price pressure across food, fuel and core segments, bolstering the chances of another round of aggressive rate hike by the central bank in June to break the back of inflation.

Having refrained from an out-of-cycle revision of its inflation forecast earlier this month even as it hiked the repo rate by 40 basis points to 4.4%, the Reserve Bank of India (RBI) will now have to sharply raise its projection for the June quarter and for the full year (FY23) from the April projections of 6.3% and 5.7%, respectively.

Inflation based on the consumer price index (CPI) breached the RBI’s medium-term target of 2-6% for a fourth straight month through April, driven substantially by global factors, mainly the rise in commodity prices and supply-chain disruptions in the wake of the Ukraine war.

While some analysts feel inflation might have peaked in April, others say it might inch up further – even till September – , before starting to moderate. Estimates of average inflation in FY23 also vary widely between 6% to 7%.

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Most see an another 40 bps rate hike in the June monetary policy review, while the increase could even be half a percentage point.

Importantly, rural inflation spiked to a 12-year high of 8.4% in April, while price pressure in urban areas is at an 18-month high of 7.1%, indicating that people at the bottom of the pyramid are facing the brunt of the price rise. Of course, a sequential price build-up has lately been more pronounced in urban areas.

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Core CPI inflation touched a 95-month high of 6.97%, having exceeded 5% for 24 consecutive months, according to an India Ratings estimate, while price pressure in food products, the dominant segment within the CPI with an almost 46% weight, has scaled a 17-month peak of 8.38%. Fuel and light inflation, too, remained high at 10.8%, against 7.5% in March.

Given the recent spike in crude oil, coal & gas prices and rise in power tariffs – on top of the elevated prices of cooking oils that are mostly imported and the rupee depreciation – the surge in inflation is unlikely to recede meaningfully soon, although a conducive base from May could somewhat bridle the pace of inflation, analysts said. This could force the RBI to join some of its global peers in aggressively tightening the measures initiated in the wake of the pandemic to support growth.

Food inflation exceeded the headline inflation for a second straight month in April. Barring pulses, key items in the food segment witnessed a significant rise in price pressure in April, as inflation in edible oils and fat surged by 17.28%, vegetables by 15.41% and spices 10.56%. Inflation in cereals and products hit a 21-month high and vegetables and spices scaled 17-month peaks.

India Ratings principal economist Sunil Kumar Sinha said, “The second-round impact of higher fuel prices has started reflecting on other goods and services.” Inflation for miscellaneous goods and services jumped to a 115-month high of 8.03% in April, having recorded 23 consecutive months of an over 6% inflation. “We have been pointing out for a while that inflation in health services is turning structural, as it has remained in excess of 6% for last 16 months. Education inflation, although low, has touched a 23-month high of 4.12% in April,” Sinha pointed out.

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The elevated price pressure suggests firms have started passing on the rising input cost to consumers, albeit to a limited extent.

Rising inflation, on top of a fragile industrial recovery (growth in the index of industrial production in March was just 1.9%) will compound the worries of policy-makers as they seek to soften the blow of the global oil price rise to the Indian economy as well as consumers.

Aditi Nayar, chief economist at Icra, said: “We now foresee a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies to 5.15%, followed by a pause to assess the impact of growth. As of now, we continue to see the terminal rate at 5.5% by the middle of 2023.”

Much, however, depends on the persistence of the Russia-Ukraine conflict and consequent volatility in global oil and food prices. A 10% rise in crude oil prices, according to Nomura, typically leads to a 0.3-0.4 percentage point (pp) rise in headline inflation and shaves off about 0.20pp from GDP growth.

RBI governor Shaktikanta Das last week warned of a “collateral risk” if inflation remains elevated at these levels for too long, as “it can de-anchor inflation expectations which, in turn, can become self-fulfilling and detrimental to growth and financial stability”.


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