(Reuters) – India’s annual retail inflation rate eased to 6.44% in February, helped by a fall in the price of some food items, but remained above central bank targets, reinforcing expectations for a further interest rate hike at its meeting next month.
The February reading was higher than the 6.35% forecast by economists in a Reuters poll and was above the upper band of the Reserve Bank of India’s (RBI) 2%-6% target, data released by the National Statistics Office on Monday showed.
Annual retail inflation was 6.52% in January.
Food prices, which account for nearly 40% of the CPI basket, rose 5.95% in February, compared with 6.0% in January, as edible oil and vegetable prices eased.
COMMENTARY:
YUVIKA SINGHAL, ECONOMIST, QUANTECO RESEARCH, NEW DELHI
“While the headline February 2023 CPI inflation has come in slightly below our expectations, it nevertheless remains fairly elevated close to January level – that had sprung a sizeable upward surprise.
“Fortunately, the sequential momentum in food prices registered a marginal deceleration, though granular pulls and pressures were evident. Protein-rich items like eggs, meat, fish and pulses offered respite along with oils and fats and vegetables, besides a lower momentum in cereals – a likely outcome of open market sales of wheat concentrated in February.
“(However) discomfort on food price outlook remains amidst soaring temperatures and the possibility of El Nino later in the year.
“We continue to expect the RBI to hike the repo rate by another 25 bps in April while keeping its stance unchanged. However, the central bank is also likely to keep a close eye on potential stress in the US banking system and stand ready to be nimble and proactive, if the need arises.”
KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU
“While relatively unchanged food inflation helped, worry about core inflation persists. At 6.6% YoY, it is at an eight-and-a-half-year high and suggesting no respite in sight. Goods inflation continues to bite and remains way above the core inflation, as does the continued increase in real estate prices. We, therefore, retain our view of another additional rate hike by the RBI in the April meeting.
“However, if the effect of the Silicon Valley Bank collapse and fear of meltdown in the financial market caused by additional tightening gets the U.S. Federal Reserve to think differently, pressure of a rate hike by the RBI might diminish.”
MADHAVI ARORA, LEAD ECONOMIST, EMKAY GLOBAL, MUMBAI
“The high inflation print again reflects the soaring cereal inflation which has been a matter of concern for the economy even though the latest set of inflation data may again overstate the extent of the increase. That said, the world order has again evolved dramatically, with higher global (and Indian) inflation prints getting collided with new uncertainties regarding the US banking system.
“Clearly the markets are flitting from theme to theme, unveiling underlying fragility. We are closely watching consistent global policy rates repricing, the pace of global inflation and banking system evolution, and the case for impending recession – all of which will shape the central bank’s policies, which could have implications for India.
“Back home, the inflation outlook is fraught with uncertainty. April will likely see another 25 bps hike and the RBI would continue to be non-committal on future rates path, as the fluid global situation demands frequent macro re-assessments.”
DEVENDRA PANT, CHIEF ECONOMIST, INDIA RATINGS, MUMBAI
“Second consecutive month of more than 6% inflation makes the monetary authority’s job difficult. The impact of monetary policy is felt with a lag and monetary tightening of FY23 would push the inflation rate down. However, the stickiness of core inflation is turning out to be a major problem for the Monetary Policy Committee (MPC). Core inflation in February 2023 has remained in excess of 6% for the last four months.
While the delayed impact of monetary policy and the government’s steps in cooling wheat inflation may tempt the MPC to go for status quo on policy rate.
SHILAN SHAH, DEPUTY CHIEF EMERGING MARKETS ECONOMIST, CAPITAL ECONOMICS, LONDON
“The slight drop in headline CPI inflation in February wouldn’t have been enough to ease the concerns of the hawks on the MPC and, as a result, we now expect another 25 bps hike to the repo rate (to 6.75%) at the RBI’s next policy meeting in April. But we doubt the hiking cycle will extend beyond that.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
“February CPI inflation while elevated is broadly in line with expectations. Cereals and milk inflation continue to be high, while fruit prices spiked up too in February. However, we see food inflation softening in March based on recent price trends.
“Core inflation remains elevated and sticky with relatively high inflation across clothing and footwear, health, personal care and effects, and household goods/services. The RBI will remain hawkish in the April policy as inflation prints have spiked back over 6% in January-February along with core inflation remaining sticky above 6%.
“We continue to expect a 25 bps repo rate hike in the April policy.”
GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI
“February CPI came nearly in line with our estimates and was led mainly by higher-than-expected print on housing and sticky core inflation. Core inflation has remained above 6% for four consecutive months underlying still-prevailing pricing power in the services sector.
“The recent developments in the United States amid the failure of the SVB and actions taken by the central bank thereafter have toned down expectations of an aggressive action despite elevated U.S. inflation.
“In this backdrop, we expect the MPC to hike repo rate by 25 bps in April policy and remain data-dependent thereafter.”
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI
“CPI inflation at 6.44% in February is partly due to the statistical adjustment made for the food grains distributed through PDS. I think the MPC will take this into account before finalising the quantum of a rate hike in April. The quarterly GDP data was not encouraging for private consumption and investment spending.
“Moreover, global risks are rising because of the contagion effect of the SVB failure. As of today, I expect the MPC to recommend a hike of 25 bps in the April policy and give clear forward guidance on future actions.
ADITI NAYAR, CHIEF ECONOMIST, ICRA, GURGAON
“While the correction in the prices of heavily weighted items in the CPI basket such as wheat, vegetables and edible oils augurs well for the food inflation print in the current month amidst a high base, there are concerns around the impact of a likely heat wave on the wheat crop and the consequent impact on wheat prices in the near term. This, along with the possibility of the occurrence of El Nino around the summer season and its impact on monsoons, would play an important role in determining the trajectory of food inflation over the next few quarters.
“Given two consecutive CPI inflation prints above 6%, the MPC may go in for another rate hike, although the decision is likely to be non-unanimous based on the minutes of the last review. Moreover, global developments over the next three weeks could impact the MPC’s decision.
UPASNA BHARDWAJ, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
“The February CPI print came broadly in line with our expectations but higher than the MPC’s upper threshold levels of 6% for two consecutive months.
“While the global financial instability has reduced the probability of a 50 basis points (bps) hike by the U.S. Federal Reserve and the Indian rupee has remained largely well behaved, we expect the higher-than-6% inflation to keep the MPC cautious and hike the repo rate by 25 bps in the upcoming April policy.”
SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, GURUGRAM
“Inflation came in higher than expected, led by higher food inflation — particularly cereals and milk inflation. The risk to inflation is tilted towards the upside with El-Nino conditions predicted in 2023. The still sticky core provides little leg room for absorbing any spikes in food inflation that might develop in the coming months.
“Rabi sowing has also been tepid compared to last year. Overall inflation prints could edge below 6% over the next quarter on account of base effects, but they are likely to jump back above 6% in the July-September quarter if the above risks materialise.
“This print strengthens the case for another 25 bps rate hike by the RBI in the next policy with an increasing possibility that further rate hikes post April cannot be ruled out now.”
(Reporting by Nandan Mandayam, Nallur Sethuraman and Nishit Navin in Bengaluru, Siddhi Nayak in Mumbai and Tanvi Mehta in Delhi; Editing by Sohini Goswami)
