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NEW DELHI : Retail inflation galloped to 7.79% in April, the fastest pace in eight years, led by a surge in food and fuel prices, raising expectations that the central bank may favour more aggressive rate hikes in June to cool prices.

A Mint poll of 24 economists estimated retail inflation at 7.5% in April. Inflation has now remained above the Reserve Bank of India’s (RBI’s) upper tolerance band of 6% for the fourth consecutive month. It was at 6.95% in March.

Economists said the higher-than-expected April reading has significantly raised the likelihood of a faster pace of rate increases by the monetary policy committee this year. The rate-setting panel raised the repo rate by 40 basis points (bps) in an out-of-turn meeting earlier this month, the first increase in nearly four years.

Experts now expect the central bank to hike the repo rate by 25-40 basis points (bps) in the June policy and raise rates by around 75-100 bps in the year to 31 March.

“The surge in the retail inflation clearly justified the off-cycle rate hike last week and significantly raised the likelihood of a back-to-back rate increase in June 2022," said Aditi Nayar, chief economist, ICRA Ltd. “We now foresee a high likelihood that the MPC will raise the repo rate by 40 bps and 35 bps, respectively, over the next two policies to 5.15%, followed by a pause to assess the impact of growth. As of now, we continue to see the terminal rate at 5.5% by the middle of 2023."

D.K. Srivastava, chief policy adviser, EY India, said he expects the RBI to increase the policy rate by an additional 50 basis points or more in one or two steps. “With higher interest rates, investment and growth may be adversely affected. But there may also be a positive spinoff due to higher growth in taxes linked to higher nominal growth," Srivastava said.

Food inflation in April soared to 8.38% in April from 7.68% in the previous month, data released by the ministry of statistics and programme implementation showed on Thursday. Economists expect inflation to slow from the current levels but remain above 6.5% for the better part of the year. “We see a higher base softening the May CPI inflation print, although it will remain above 6.5%," Nayar said.

India is among several major economies facing high inflation, with the US at 8.3% in April and the euro region at 7.5%. China, however, reported a 2.1% retail inflation in April.

Meanwhile, industrial output data for March showed subdued growth, complicating the challenges for monetary and fiscal policymakers. The index of industrial production (IIP) grew 1.9% in March from 1.7% in the preceding month.

Industrial output data, also released by the ministry on Thursday, showed the output of consumer durables and non-durables contracted in March from the year-ago period, indicating the impact of inflation on demand while capital goods output growth, a proxy for investment growth, remained muted in March over a high base.

IIP growth has broadly remained lacklustre at below 2% in the last five months, according to Rajani Sinha of CARE Ratings. The manufacturing sector expanded 0.9% in March from 28.4% in the year-ago period.

“For India’s economy to recover, it is very critical for consumption expenditure to start improving, which, in turn, will help improve capacity utilization levels and start the private investment cycle," Sinha added.

Spiralling inflation and the impact of the war in Europe have prompted agencies, including the RBI, to temper India’s growth forecast for FY23.

Runaway inflation has caused political friction between the Centre and states over who should cut taxes on fuel to reduce pump prices. That the cost of containing inflation will be slowing global growth was manifested in the April update of IMF’s World Economic Outlook. The report projected global output growth to slow to 3.6% in 2022 and 2023 from 6.1% in 2021.

“If global inflation does not sufficiently decline despite the aggressive monetary tightening, sharply slowing growth, it points at the persistence of supply-demand imbalances that only coordinated actions of world leaders can resolve," the finance ministry said in its April economic review.

Gireesh Chandra Prasad in Delhi and Shayan Ghosh in Mumbai contributed to this story.

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