When the Reserve Bank of India’s monetary policy committee (MPC) met earlier in February, the expectation was that there will be a final 25 basis points repo rate hike, which will then be followed by a long pause. Inflation, after all, seemed to be coming under control and within the central bank’s target band of 2-6 per cent, and with global growth expected to slow down in 2023, the RBI also needed to wait and watch out for the effects of the rate hikes implemented earlier.
As expected, RBI did raise interest rates, but the overall tone was also rather hawkish and there were enough indications the rate hikes may not be done yet, especially given the continued stickiness in core inflation (barring food and energy prices).
The latest consumer price index (CPI) inflation data for January, perhaps, in a way, signals we may still be some time away before inflation is well and truly under check and that means a further tightening of monetary policy may still be needed.
After easing to below 6 per cent in November and December, retail inflation in January spiked once again to 6.52 per cent. It was at 5.72 per cent in December. Rise in food prices was among the key reasons behind inflation once again crossing RBI’s upper-end of the target band.
According to Suvodeep Rakshit, senior economist at Kotak Institutional Equities, much of this sharp increase in inflation could be attributed to high cereal prices and partly due to an unfavourable base. Inflation now could remain around 5.5-6.0 per cent in the near-term with cereal prices staying on the upside.
“The hawkish tone of the RBI in the February policy seems justified with both headline and core inflation remaining sticky and elevated. The RBI is unlikely to change its stance in the April policy while a 25 bps hike is a distinct possibility now (compared to a larger probability of pause earlier),” he said.
Prevailing mandi (market) prices suggest that cereals like wheat, for instance, continues to trade well above its minimum support prices, agreed Radhika Rao, executive director and senior economist at DBS Bank. Further pass through of input prices in goods and seasonal jump in housing also left the core inflation at an elevated 6.1 per cent, higher than the average six-months prior, noted Rao.
“Yesterday’s inflation outturn, sticky core and a likelihood that February 2023 inflation might also stay above 6 per cent, raise the odds of a follow-up rate increase at the April rate review,” she added.
Raghvendra Nath, MD of Ladderup Wealth Management, also feels that we may see further rate hikes from RBI if the inflation figures continue to stay above the upper end of the band.
Madhavi Arora, lead economist at Emkay Global Financial Services, said they are currently tracking February inflation at 6.3 per cent.
“Near-term pressure for headline inflation could arise from a sustained uptick in cereal prices. Besides, the risk of further rise in global commodities, uncertain foreign exchange and sticky services inflation could keep the inflation trajectory elevated,” said Arora.
The fourth quarter (January-March) inflation is now likely to overshoot RBI’s revised forecast (5.7 per cent) by 50 bps, she said. The higher-than-expected inflation will be a “sore point” for the RBI and could lead to another 25 bps rate tightening in April, added Arora.
Nomura Securities economists Sonal Varma and Aurodeep Nandi say there is a 30 per cent probablity now that the RBI may raise rates in April. They are expecting headline inflation to remain around the January levels in February as well, while core inflation will also be sticky around 6 per cent. Both should then moderate to 5.6-5.7 per cent in March and then track closer to 5 per cent from April, said Varma and Nandi.
“Higher January CPI data suggest an upside risk to the RBI’s Q1 2023 inflation projection, and alongside sticky core would suggest the job on inflation is not yet done. Hence, the April MPC meeting is live for a 25 bps hike,” they noted.
In the latest MPC meeting, the RBI saw inflation averaging 6.5 per cent in the current 2022-23 financial year and at 5.3 per cent in 2023-24. In the ongoing Jan-March quarter, retail inflation is seen at 5.7 per cent, further moderating to 5 per cent in Apr-June, but then rising slightly to 5.4 per cent in the second and third quarter and 5.6 per cent in the fourth, it had noted.
