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Inflation likely rose to 18-month high of 7.5% in April: Poll

Any reading above RBI’s 6% upper tolerance level will force the monetary policy panel to raise rates again (Photo: Mint)Premium
Any reading above RBI’s 6% upper tolerance level will force the monetary policy panel to raise rates again (Photo: Mint)

Retail inflation in India likely surged to an 18-month high of 7.5% in April from 6.95% in March, driven by a broad-based rise in the prices of fuel, cooking gas, and some food items, a Mint poll of 24 economists showed ahead of the data due to be released on Thursday.

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Retail inflation in India likely surged to an 18-month high of 7.5% in April from 6.95% in March, driven by a broad-based rise in the prices of fuel, cooking gas, and some food items, a Mint poll of 24 economists showed ahead of the data due to be released on Thursday.

The poll’s median projection stood at 7.5%, with several economists warning inflationary pressures stoked by the Russia-Ukraine war could keep retail inflation above the central bank’s upper limit of 6% over the next few months, potentially leading to a failure of the monetary policy committee (MPC) to keep inflation within the mandated band.

Steady rise
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Steady rise

The retail inflation data for April will also shape the MPC’s approach to interest rate changes at the June meeting. Any reading above the central bank’s 6% upper tolerance level will force the monetary policy panel to raise interest rates again to curb inflationary pressures. If the economists’ inflation estimates are correct, another interest rate hike is almost certain next month.

Last week, in a surprise off-cycle move, the MPC voted to hike the policy repo rate by 40 basis points, reversing the rate cut announced in May 2020, as it acknowledged inflationary pressures were persistent.

The rate-setting panel is deemed to have failed when average Consumer Price Index (CPI) inflation falls outside the 2-6% band for three quarters in a row. If the poll projection is realized, CPI inflation would have been above the 6% mark for the fourth consecutive month.

“The inflation trajectory staying above the 6% mark for three quarters is almost given," said a report by Kotak Mahindra Bank dated 4 May. “Hence, the off-cycle rate hike should be seen as a remedial action to acknowledge failure to adhere to inflation targets."

Predictions in the poll for April CPI inflation were in the range of 7.2-7.7%. “An increase in food prices led by cereals, edible oils and proteins, along with the domestic retail fuel price hikes, likely contributed to upward inflation pressure. We estimate food inflation at 7.9% and core inflation at an eight-year high of 6.8%," said Kanika Pasricha, an economist at Standard Chartered Bank, who projected April headline inflation at 7.5%. Food inflation was 7.5% in March, and core inflation was 6.3%.

In April, oil marketing companies hiked petrol and diesel prices by a cumulative 3.6 per litre following the surge in crude oil prices, nearly offsetting the cuts in central excise duty and value-added tax by some states in November. Furthermore, revisions in electricity tariffs by some states could also put upward pressure on inflation, Barclays said in a recent note. “We expect the persistence of inflation at elevated levels to prompt the monetary policy committee to undertake another 50 bps hike in repo rate in June."

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