India’s retail inflation eases to 6.44% in Feb, but remains above RBI’s target band

India's retail inflation edged down slightly to 6.44 per cent in February from January's three-month high of 6.52 per cent, according to the data released by the Ministry of Statistics and Programme Implementation (MoSPI) on Monday.

However, the inflation print stayed above the Reserve Bank of India's (RBI) upper tolerance level of 6 per cent for second straight month. This may prompt the monetary authority to weigh an increase in borrowing costs to the highest level in seven years.

Inflation in the food basket in Feb 2023 was at 5.95 per cent, up from 5.94 percent in January, as per the government data. The food basket has weightage of 39.06% in the overall Consumer Price Index.

The Consumer Price Index (CPI) based retail inflation was 6.52 per cent in January, after declining to a one-year low level of 5.72 per cent in December.

Another 25 bps rate hike by RBI in next policy review?

“Overall, the worst of inflation is likely behind us. Headline inflation could fall below 6% in Mar'23 and further down towards 5% in coming months. We also believe that 25 bps hike in April by the RBI is almost certain,” said Nikhil Gupta, Chief Economist, MOFSL Group.

"As feared, the CPI inflation barely budged, printing at 6.44% in February 2023, in line with our expectations, with upticks in cereals, milk and fruits inflation, as well as pan, tobacco and intoxicants and housing nearly offsetting the dips in the other three categories," said Icra Chief Economist Aditi Nayar.

"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," Nayar said.

"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," said Sakshi Gupta, Principal Economist at HDFC Bank, Gurugram.

"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," Gupta said.

Price pressures resurfacing after easing below 6 per cent in the last two months of last year will probably convince the central bank to raise the benchmark rate for a seventh straight time when it meets next month on 6 April, Rahul Bajoria, an economist with Barclays Plc wrote in a note.

The Barclays economist reaffirmed his view even after a sudden eruption of financial strains in the US that prompted Goldman Sachs Group to drop its call for a March Federal Reserve hike.

“RBI will pay close attention to the Fed this week, but will broadly look at domestic inflation and growth to drive its policy,” he said. “Unless RBI believe global spillovers are large and negative, I don’t think next meeting’s outlook for a hike changes for now.”

The closures of Silicon Valley Bank and Signature Bank are prompting traders to pare bets of a US rate increase this month just days after US Federal Reserve Chair Jerome Powell flagged the possibility of returning to bigger rate hikes as inflation proved persistent.

The risk of heat waves in India is another concern that could impact food production and prices, he added.

Core inflation, which has stayed above 6 per cent for 16 months, must also ease toward 4 per cent in line with the headline number, monetary panel member Shashanka Bhide said in an interview last month.

The central bank has raised the policy rate by 250 basis points since May last year to 6.5 per cent and an increase up to 6.75 per cent would take India's repurchase rate to the highest since February 2016.