Even as the retail inflation in January 2023 has jumped to a three-month high of 6.52 per cent after remaining under the RBI’s comfort zone for two consecutive months, experts said the RBI MPC is now unlikely to pause the repo rate hikes. The RBI last week raised the key policy rate by 25 basis points to 6.50 per cent.
Aditi Nayar, chief economist and head (research and outreach) at ICRA, said, “The Consumer Price Index (CPI)-based inflation recorded a sharper-than-expected spike to a three-month high of 6.5 per cent in January 2023, led by an unexpectedly acute jump in the food inflation. Following the surge in the January 2023 CPI inflation print, we have revised our forecast for the Q4 FY2023 average CPI inflation to 6.2 per cent from 6.0 per cent, which exceeds the projection released last week by the MPC, suggesting that another rate hike may be in the offing in April 2023.”
India’s retail inflation in January 2023 rose to 6.52 per cent on costly food items and fuel. In December 2022, the Consumer Price Index (CPI)-based inflation had eased to 5.72 per cent. In November 2022, it had fallen to 5.88 per cent. The retail inflation came under the RBI’s 2-6 per cent band in November with 5.88 per cent rate after remaining beyond it for 10 months consecutively.
Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said, “The January 2023 inflation has surprised sharply on the upside. The previous softer readings were led by food prices and this reading has reversed the softness as cereals, milk and other protein rich items continue to remain elevated. Besides, core inflation also remains elevated.”
Bhardwaj added that overall, the readings are expected to unnerve the markets as the risk of more aggressive rate hikes increase. “We now assign a high probability of 25bps of rate hike in April with the scope for stance change shifted for future.”
Suman Chowdhury, chief analytical officer of Acuité Ratings & Research, said, “In the light of the unexpected inflation trajectory, the likelihood of a further hike in interest rates in the next MPC has surely increased. It’s unlikely that the MPC will opt for a pause in an environment where both the headline CPI inflation and the core inflation doesn’t come down sustainably below 6 per cent.”
He also said the monetary stance on the “withdrawal of accommodation” is expected to continue in the near term. This may also lead to a hardening of rates in the bond market.
However, Sunil Kumar Sinha, principal economist at India Ratings and Research, expects a pause in the rate hikes. “Ind-Ra believes with the softening of global commodity prices and normalisation of supply chain hopefully the pricing power exercised by the manufacturing sector will wane.”
He said the February 2023 headline retail inflation is expected to remain around 6.5 per cent, and is expected to moderate from March 2023. “Therefore, Ind-Ra expects a pause in the policy rate in the near term.”
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