In January, retail inflation breached the Reserve Bank’s upper tolerance level of 6 per cent after two months of deceleration and touched a three-month high of 6.52 per cent, mainly due to higher prices in the food basket, including cereals and protein-rich items.
Barring November and December 2022, retail inflation has remained above the 6 per cent level throughout 2022. The previous high was 6.77 per cent in October 2022.
Deutsche Bank economists in a report on Tuesday said the January inflation shocker justifies another 25 basis point (bps) hike in its next monetary policy scheduled in April.
The analysts do not see rate hikes beyond April, but said clearly the risks have risen for rates to be higher for longer. They also do not see the RBI changing the current monetary policy stance of withdrawal of accommodation anytime soon.
They said the sharp spike in January inflation was led mainly by the cereals component, which was up 16.1 per cent on-year, making it the highest increase recorded in the current CPI (Consumer Price Index) series and thus reversing the entire improvement seen in the inflation trajectory since November 2022.
Cereals have a weight of almost 10 per cent in the CPI basket. The January CPI print essentially neutralises all the improvement seen in the CPI trajectory since the positive surprise in November when CPI inflation unexpectedly eased to 5.9 per cent, they said and projected that CPI inflation will average about 6.3 per cent in the March quarter, with February CPI likely around similar levels to January and March likely to fall slightly below 6 per cent.
For FY24, they expect CPI inflation to average about 5.5 per cent, up from the earlier forecast of 5 per cent.
Similarly, Tanvee Gupta Jain, UBS India economist, the surprise spike in the January inflation print largely came in from higher than expected food inflation and this was something the last monetary policy noted.
While maintaining their previous stance of RBI pausing in the April monetary policy review, she said the probability of another 25-bps rate hike after the higher than expected inflation print for January, has gone up.
D K Joshi, chief economist at Crisil, said the acceleration in the price index was driven largely by a rise in food (cereals, protein-based items) and core (personal care) inflation. Also, both momentum (from on-month increases) and some low-base effect contributed to pulling up in the headline inflation. In fact, excluding vegetables, CPI inflation would have jumped to 7.7 per cent compared to 7.2 per cent in December, he said.
S”ticky core inflation continues to pose challenges from the demand side. We maintain our CPI inflation forecast for fiscal 2023 at 6.8 per cent, given the underlying pressures from food and core,” Joshi said.
Economists at India Ratings said the January CPI print highlights that pressures on headline inflation from food and core items continue, warranting caution and forecast for annual CPI inflation printing in at 6.8 per cent in fiscal 2023, above the RBI’s revised forecast of 6.5 per cent.