Although retail inflation The jump in fuel prices in March led to a 17-month high of 6.95 per cent and food items Like vegetables, milk, meat and cereals, it may remain elevated in April amid increase in prices of essential medicines. It may also indicate reserve Bank of India Controlling inflation has now taken center stage for the central bank instead of pushing growth, since going for a rate hike as early as June. Here’s the latest inflation data and expectations going forward:
What pushed inflation in March
Inflation increased in March mainly on account of costlier food items. Inflation in food articles stood at 7.68 per cent during the month as against 5.85 per cent in the previous month. Core inflation, which excludes the food and fuel components, also rose to a 10-month high of 6.29 per cent in March.
The prices of food and vegetables have shot up in the country and lemon has reached up to Rs 250 and other essential commodities have also become expensive. This is due to recent crop losses in parts of the country due to cyclones and high transportation costs amid rising international crude oil prices over the Russo-Ukraine war.
impact on markets
India’s benchmark 10-year government bond yield touched a record high of 7.19 per cent on Tuesday after rising by four basis points amid concerns of rising inflation and tighter monetary policy to ease further liquidity in the country. The rupee also fell 23 paise to close at 76.14 against the dollar. BSE benchmark Sensex also ended 388 points lower at 58,576.37 and NSE Nifty fell 144 points at 17,530.30.
inflation is on the rise
Rating agency India Ratings in a report said that inflation of health and household goods/services is structurally changing as health inflation has been over 6 per cent in the last 15 months and inflation of household goods/services is high. 5 percent in the last 10 months. “Going forward, health inflation is likely to put further pressure on retail inflation, with an increase in the cost of essential medicines from April 2022.”
Recently, the National Pharmaceutical Pricing Authority allowed a 10.7 percent hike in the prices of scheduled drugs that are under price control, the highest price hike allowed.
DRE Reddy, Chief Executive and Managing Partner, CRCL said that commodity prices in India during April will be guided by the impact of weather conditions and geo-political scenario.
Now, fuel prices have remained unchanged for a week now due to cooler crude oil prices. If the Russo-Ukraine war escalates, it could raise crude oil prices, which could push prices of domestic food and other commodities further upward.
According to the latest RBI survey, households also expect inflation to exceed 10 per cent for both three months and one year.
What does this mean for RBI policy
Rising inflation in the country has raised the possibility of a faster and faster rate hike by the Monetary Policy Committee of the RBI. The RBI has been tasked with keeping inflation in the range of 2-6 per cent. CPI-based inflation, which is the reference point for the RBI to arrive at its bi-monthly monetary policy, has remained above the central bank’s comfort zone, with rates at 6.01 per cent in January and 6.07 per cent in February.
Now, with the inflation rate in March being the highest in 17 months, analysts expect the RBI to hike rates as early as June. India Ratings, in its latest remarks, said it believes that the April 2022 monetary policy has sown the seeds of liquidity normalization first and then policy stance/policy rates. “We expect a hike of 50 bps in policy rates in FY13. However, the timing of the rate hike will depend on the data.”
ICRA Chief Economist Aditi Nair said, “If the next CPI inflation prints are not substantially calmed down from March 2022 levels, the rate hike cycle could start as early as June 2022. We now expect to see a rate hike of 50-75 bps by the end of Q2 FY2023, followed by a break in H2 FY2023 and perhaps 50 bps in FY2024.”
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