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India’s headline retail inflation got closer to the upper tolerance level of the 2-6% flexible inflation target given to the country’s central bank. While part of it is due to a low base, there is enough for the Reserve Bank of India (RBI) to worry about.

Consumer price index-based inflation quickened to 5.52% in March from 5.03% in February, led by both food and fuel prices. Food prices reflected the seasonally uptick as well as a base effect.

However, inflation has declined sequentially, indicating that momentum has reduced.

The base push
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The base push

Ergo, analysts believe that food inflation may trend down in the coming months.

Those at Icra Ltd expect food inflation to ease to 2-2.5% in April. Fuel prices may remain elevated given that domestic taxes continue to stay on and global oil prices do not show any signs of cooling off.

To that extent, there is no surprise in the inflation data for the central bank and may not move the needle for the RBI.

As such, the RBI has forecast retail inflation to stay above 5% for the most part of FY22.

What should worry the RBI is the fact that inflation remains high despite considerable slack in the economy.

The industrial output shrank by 3.6% in February, a sharper contraction compared with the previous month.

The RBI’s survey on capacity utilization showed that it remained far lower at 66.6% in the December quarter compared with the pre-pandemic level of above 70%.

Despite this slack, inflation has remained stubbornly high. To be sure, a lot of it is because of input price pressures as commodity prices have surged globally. Some of it can also be attributed to supply disruptions both international and domestic. As various countries continue to flirt with lockdowns, and India too is witnessing several regional lockdowns, supply chains have been disrupted.

Analysts believe that unless the infection curve is brought under control and the concerns over lockdowns ease, the outlook on inflation may remain clouded.

Analysts at Emkay Global Financial Services Ltd believe that supply disruptions due to lockdown may put upward pressure on food prices and other input prices too.

“However, local lockdowns, if they persist, could impact services demand negatively, will put downward pressure on Q1FY22 core inflation and act as a balancing factor to emerging upside risks to inflation," Madhavi Arora, lead economist at the firm, said in a note.

The upshot is that the inflation curve is evolving, and the RBI would need to be vigilant even as it focuses on growth.

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