Inflation stays above RBI tolerance limit; 25 bps rate hike likely

India’s retail inflation eased marginally to 6.44 per cent in February as compared to 6.52 per cent in the previous month but stayed above the RBI’s upper tolerance band, putting pressure for further hike in policy interest rates.

As per the monthly data released by the National Statistical Office (NSO) on Monday, inflation remained sticky due to high increase in prices of essential items like cereals, milk and fruits.

The price rise was sharper in rural India than urban parts of the country. Rural inflation stood at 6.72 per cent, while urban inflation at 6.10 per cent in February.

The headline retail inflation has now been above the RBI’s medium-term target of 4 per cent for 41 months in a row. The Consumer Price Index (CPI) based inflation stood at 6.07 per cent in February 2022.

Analysts said that the sticky inflation would force the RBI to further tighten policy repo rates.

Suvodeep Rakshit, senior economist, Kotak Institutional Equities, said the RBI is likely to hike policy repo rate by 25 basis points in April.

“The RBI will remain hawkish in the April policy as inflation prints have spiked back over 6 per cent in January-February along with core inflation remaining sticky above 6 per cent,” said Rakshit.

Radhika Rao, executive director and senior economist, DBS Group Research, said the RBI is likely to hike policy repo rate by 0.25 per cent and maintain a hawkish bias in its April review.

The RBI has hiked policy repo rate by 2.5 per cent since May 2022. In its latest policy review announced in February, the RBI hiked key rates by 25 basis points taking the benchmark repo rate to 6.5 per cent, the highest level in four years.

Core inflation stood at 6.1 per cent in February. It has remained elevated and sticky with relatively high inflation across clothing and footwear; health and personal care, and household goods and services.

Clothing and footwear became costlier by 8.79 per cent year-on-year during the month under review. Fuel and light became costlier by 9.90 per cent. Food and beverages inflation rose to 6.26 per cent. Cereals price soared by 16.73 per cent year-on-year during the month under review. Fruits became costlier by 6.38 per cent. However, vegetables became cheaper by 11.61 per cent in February on a year-on-year basis.

“Fuel inflation has begun to ease on softer crude oil prices, but food and core continue to be the pain points with inflation rates above 6 per cent. That means another rate hike by the RBI in April cannot be ruled out,” said Dipti Deshpande, principal economist, CRISIL Ltd.

However, Deshpande added that inflation is expected to moderate next fiscal, helped by a reduction in fuel and core inflation.