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CPI inflation remains stubbornly high at 6.44% in Feb; April rate hike probable

In February, the consumer price index (CPI) showed a slight decrease in retail inflation, but it still stayed above the 6% level for the second consecutive month. This indicates that prices for various goods and services remained high across most categories. As a result, there is a higher possibility of the Reserve Bank of India (RBI) increasing interest rates in its upcoming policy review in April.

On Monday, official data was released indicating that retail inflation in February was at 6.44%, a slight decrease from the previous month’s figure of 6.52%. However, compared to a year ago, the inflation rate had increased from 6.07%. Both food and core inflation remained high, with rates over 6% in February.

Additionally, price pressures were more significant in rural areas compared to urban centers.

The CPI inflation rate has been above the RBI’s medium-term target of 6% for nine months this fiscal year. The rate dipped slightly below 6% only in November and December 2022. It was anticipated that inflation would remain high in February, but analysts are optimistic that there may be some moderation from March due to a favourable base effect.

The latest retail inflation data is the final set of information that will be available to the monetary policy committee before it meets in April. The persistently high inflation rates may lead to an increased possibility of the RBI implementing a 25 basis point rate hike during its policy review. Some analysts speculate that the hike may even be more significant.

This stance is in contrast to Goldman Sachs’ analysts’ predictions on Sunday that the US Federal Reserve may not raise interest rates during its March 22 meeting in light of recent stress in the banking sector.

In February, higher cereal prices contributed to the increase in food inflation, even though vegetable prices remained in the deflationary zone, which was a relief. The food and beverages basket, which makes up 45.9% of the CPI inflation rate, experienced further inflation, with retail inflation in this category increasing to 6.26% in February from 6.19% in January.

In February, while vegetable prices continued to decrease, registering a deflation rate of 11.61% for the fourth consecutive month, cereal prices continued to increase, with cereal inflation hardening further to 16.73% from 16.12% in January. This marked the sixth consecutive month of double-digit inflation in cereals.

The government has sold 2.8 million tonnes of wheat in the open market from the Food Corporation of India (FCI) stock, which has helped to some extent in controlling the prices of wheat.

In February, milk inflation has become a growing concern, with the inflation rate increasing to 9.65% from 8.79% in the previous month. Inflation in fruits has also surged to 6.38% from 2.93% in January, indicating that the prices of these essential food items are increasing. However, inflation in most other food items, including spices (20.2%) and pulses (4.09%), eased in February.

Core inflation remained a concern, as it remained at 6.1% in February, indicating that the prices of services and other items have remained elevated. While CPI inflation in four of the baskets, including clothing and footwear (8.79%), housing (4.83%), fuel and light (9.9%), and miscellaneous (6.12%), dipped marginally in February from January, it still remained high. In particular, input costs in household goods and personal care products have pushed up prices in the miscellaneous category.

Rural inflation remained higher than urban inflation in February, with a rate of 6.72%, compared to urban inflation at 6.1%. The higher rural inflation is primarily due to the higher weightage of the food and beverages basket, which has seen a steady rise in prices.

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