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India’s inflation story is set to take an uncomfortable turn over the next few months as the base effect starts turning unfavourable while price pressures continue to build up. Retail inflation, which rose to 4.9% in November, may shoot up close to 8% by March if consumer prices continue to rise at their current pace, a Mint analysis shows.

Even in the absence of additional price pressures, inflation will hover above 6% at least until March, setting a tough backdrop for the Reserve Bank of India’s (RBI’s) monetary policy committee meetings scheduled in February and April.

Of late, inflation based on the Consumer Price Index (CPI) has remained below RBI’s upper tolerance limit of 6% due to the high base of 2020. Inflation stayed above 6% for much of last year, but slid to 4.6% in December 2020, which means that the base effect will no longer cover up for the rapid rise in prices now on. Sequentially, the CPI rose 1.4% in October and 0.7% in November.

The inflation trajectory so far had given room to the rate-setting panel to keep the repo rate unchanged and stance accommodative. Earlier this month, RBI said domestic recovery needed sustained support to make it more broad-based while remaining watchful on the inflation dynamics.

However, while the central bank has projected inflation at 5.7% in the March quarter, our analysis shows that it could average 6.5% even if prices remain where they are. High fuel prices, supply-chain disruptions, and a revival in demand are expected to keep a sustained upward pressure on prices.

Food inflation already more than doubled to 1.9% in November, and data for December so far shows higher year-on-year price rise for many food items.

On the fuel front, a cut in excise duty in early November did not offer much relief, with fuel and light inflation moderating only to 13.3% from 14.3%.

Unless there is a sharp drop in crude oil prices or another round of tax cuts by the government, fuel and light inflation will remain elevated.

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If the CPI inflation continues to rise 0.4% on a month-on-month basis, the average pace of rise over the past year, inflation could average 7.7% in the March quarter.

At half the pace (0.2% monthly rise), inflation could still average 7.2% in that quarter. Many economists also expect inflation to average at least above 6% in the fourth quarter, with ICICI Securities Primary Dealership projecting a figure of 6.2%.

That said, renewed concern over the new Omicron variant of coronavirus may keep RBI focused on growth, despite rising inflationary risks. However, this could lead to a faster catch-up in 2022-23.

“We pushed back our expectation of the first repo rate hike from February to April, in light of the RBI’s higher inflation tolerance; but we now expect it to hike the repo rate by 100 basis points (bps) cumulatively in 2022, up from our previous forecast of 75 bps, due to higher inflation risks," said Nomura in a report on 14 December. One basis point is one-hundredth of a percentage point.

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