RBI Says Inflation ‘Sticky’, Does It Indicate Another Repo Rate Hike?

The Reserve Bank of India (RBI) noted in a report that while retail inflation has moderated, it is still high, raising speculation that it may continue its monetary tightening to check price rise
RBI Says Inflation ‘Sticky’, Does It Indicate Another Repo Rate Hike?

In its State of the Economy report, the Reserve Bank of India (RBI) noted that while retail inflation eased to 6.44 per cent in February from 6.52 per cent in the previous month, it still remains high, fueling speculation that there may be another repo rate hike soon.

The report assumes significance ahead of its monthly Monetary Policy Committee (MPC) meeting from April 3-6 to review the inflation situation in the country.

After its last repo rate hike on February 8, 2023, RBI indicated that it might not be the last, and the new report concurs with this view.

“Consumer price inflation remains high, and core inflation continues to defy the distinct softening of input costs,” the central bank said in the report.  

Consumer price index (CPI), which measures changes in the prices of a representative basket of goods and services, shows that core category and fuel prices increased by 41 bps and 5 bps in a month, respectively.  

However, RBI attributes the slight cooling off in inflation to a favourable base effect of 24 bps in February, helping moderate headline inflation by 8 bps between January and February.

The report noted that India emerged stronger from the pandemic years, with a steady growth momentum since the second quarter despite global economic headwinds and recession fears. The growth expectation could also prompt the central bank to raise its repo rates.

“Despite some moderation in credit growth in recent months, the overall growth remains strong. In terms of geographical distribution, metropolitan branches of banks, which account for nearly 60 per cent of bank loans, led the lending expansion,” it said.

Food Inflation

Food inflation was marginally higher at 6.3 per cent in February compared to 6.2 per cent a month ago. The prices of cereals rose by 16.7 per cent, the highest since June 2013. Milk, fruits, sugar, non-alcoholic beverages and prepared meals, other major sub-groups, also recorded higher inflation. However, the prices of edible oils declined.

Cereal prices rose despite the Food Corporation of India's (FCI) open market sales that tempered wheat costs. This cooling effect may continue into March. Price data for March shows that vegetable and cereal prices, barring red lentils, were declining.  

The rural-urban inflation gap also narrowed to 62 bps in February from 85 bps a month ago despite rural inflation at 6.72 per cent. Andhra Pradesh and Telangana recorded higher inflation at 8 per cent, while Chhattisgarh, Delhi, Goa, Himachal Pradesh, and Manipur saw below 4 per cent.

In light of recent bank failures, global forecasts show the Fed might hike rates only by 25 bps, down from 50 bps expected earlier. However, any rate hike can prompt the RBI to follow suit. RBI’s repo rate—the rate at which it lends to commercial banks—currently stands at 6.50 per cent.

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