India’s retail inflation surged to 7.79 per cent on an annual basis in the month of April, data from the Ministry of Statistics and Programme Implementation showed on Thursday. The rise is attributed to higher edible oil and fuel prices.
This now marks the fourth consecutive month where headline retail inflation has remained above the Reserve Bank of India’s (RBI) upper tolerance level of 6 per cent.
April’s data could prompt the RBI to go for another rate hike in its June meeting. Last week, in an off-cycle move, it had hiked rates by 40 basis points for the first time since August 2018 in line with its April meeting’s outcome of “withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.”
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said, “The April CPI inflation print of 7.79 per cent is in line with our estimate of 7.78 per cent. The increase on a sequential basis as expected was led by food (mainly cereals, edible oils, fruits, and spices), fuel products, and components of household-related goods and services.”
He added that rural inflation continued to outpace urban inflation for the fourth consecutive month and will add to the concerns on rural demand. Core inflation continues to increase and the April print of around 7.3 per cent will be a concern for policy formulation. April headline inflation print is likely to be the peak for the year.
“However, we do not expect inflation to go below 6 per cent for the rest of the year with prints over next few months remaining around 7-7.5 per cent. Over the next few months we should be focusing on movement in edible oils, crude prices and fuel price hikes, kharif MSP announcement, and pass-through of input prices by the companies to glean on the inflation trajectory,” Rakshit added.
On the monetary policy front, we expect the RBI to hike repo rate by 35-40 bps along with 50 bps hike in CRR. In CY2022, from hereon, we expect repo rate hikes of 90-110 bps along with 50 bps of CRR hike. The RBI would aim to reduce liquidity along with reverting to above 5.15 per cent level of repo rate as soon as possible, Rakshit said.
Also, Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank said, “The inflation readings came in line with our expectations at elevated levels. While we expect April 2022 to have likely marked the peak for headline CPI inflation, the trajectory will witness a very slow descent, with all CY2022 readings likely to remain above 6 per cent.”
She added that this will intensify the pressure on the MPC to aggressively frontload policy rate hikes, especially with no near term respite seen on the supply side and geopolitical tensions. We expect another 90-110bps of a repo rate hike in CY2022, with 35-40bps in the June policy. We also expect an additional CRR hike of 50bps in order to quickly streamline the monetary policy and liquidity stance.