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India’s retail inflation accelerated to a three-month high in February on higher fuel prices, which could challenge the central bank’s accommodative stance. Image Credit: Aditi Bhaduri

Mumbai: India’s retail inflation accelerated to a three-month high in February on higher fuel prices, which could challenge the central bank’s accommodative stance and record-low key policy rates adopted to boost the pandemic-hit economy.

India’s retail inflation rose to 5.03 per cent in February from a year ago, government data released on Friday showed.

“Improving growth expectations and firm crude prices are complicating monetary policy expectations. The one-year implied rate has risen this year, as have 5-year overnight index swaps, as markets build policy tightening risks,” said Radhika Rao, DBS Bank Singapore.

Bounce in February’s inflation ... adds to this debate. Much of the increase stemmed from a sequential uptick in staple vegetables and commodity price pressures. With part of the pass-through also seeping into services (transport), core inflation hardened to 5.9 per cent year on year, spurred also by a return in the demand impulse and return in producers’ pricing power.

“To douse premature rate tightening expectations, the RBI is likely to reassert its accommodative stance on rates as well as place liquidity normalisation on a slow gear,” said Rao.

Price pressure is also building up from manufactured product price (driven by a sharp rise in commodity prices) and house price channel. Continued stickiness of core inflation adds to the concern.

“While the low statistical base effect is partly responsible for this uptick, there are telltale signs of price pressures building up, notably through petro (petroleum) product prices bus and airfare segment,” said Kunal Kundu, India Economist, Societe Generale.

Rate hike?

“If the underlying price pressure continues to remain elevated even when the base effect normalises, there is a high possibility of RBI opting for a rate hike sooner than we expect.” Sakshi Gupta, senior economist, HDFC Bank.

From a monetary policy perspective, the rising inflationary risks although still nascent, could trigger some caution from the RBI.

“That said, we continue to see the central bank keeping monetary policy accommodative and focus towards managing yields and supporting growth for now. We expect CPI to average at 5-5.5 per cent in H1 FY22.” Madhavi Arora, lead economis, Emkay Global Financial Services.

Risks of increasing input costs, higher commodity prices and seasonal upside in food prices and better pricing power remain key risks to inflation.

“We see core inflation outdoing headline inflation through most parts of FY22. While this could worry the policymakers, the policy stance will likely remain accommodative both on rates and liquidity front in CY21.” Garima Kapoor, economist, Institutional Equities, Elara Capital.

While the headline CPI numbers post March-2021 will begin to moderate amid base effect, core inflation is expected to remain firm amid higher commodity and especially crude prices.

“We expect global crude oil prices to remain elevated at least for another 4-5 months owing to the widening gap between global oil demand and supply. Given that the government is likely to overachieve its FY21 revenue target, a likely cut in excise duty may be on the cards.” Sujan Hajra, chief economist, Anand Rathi Securities.