India inflation touches 17 month high of 6.95%

Inflation in India has been on an ascendant since the last 6 months and the latest CPI inflation for Mar-22 came in at a 17-month high of 6.95%. Between Sep-21 and Mar-22, retail inflation surged by 260 bps from 4.35% to 6.95%.

There could be more to come and here is why. Petrol and diesel price hikes have just started getting factored in Mar-22 and the downstream impact on transport and logistics inflation will be evident in Apr-22.

The highest weight in the CPI inflation basket in India is food inflation and there were two aspects to it. First was the spike in overall food inflation and the second was the distinct spike in rural food inflation. Food inflation for Mar-22 was up by 183 bps sequentially from 5.85% to 7.68%.

Over the last 5 months, food inflation has surged by an incredible 600 bps, despite hopes of robust Rabi arrivals. Food basket pinches due to its 45.86% weightage.
 

Check - Inflation for Feb-22 comes in higher than expected


However, the bigger story was the spike in rural inflation in Mar-22. Rural inflation was sequentially up from 6.38% in Feb-22 to 7.66%. That was largely driven by rural food spiking from 5.81% to 8.04% month-on-month.

Rural inflation spike was visible in a number of products. For instance rural inflation for meat & fish was 9.82%, oils & fats 20.75%, spices 8.96%, vegetables 10.57%, clothing 9.00%, footwear 12.18% and personal care at 9.34%.
 

Within the overall inflation basket, core inflation (excluding food and fuel) has a special significance. Core inflation stood at a new high of 6.5% in Mar-22. Why does core inflation matter? It is stickier and more structural, so it is harder to control.

Controlling core inflation is normally an economic trade-off between revenues and inflation control. That is the dilemma the government must deal with in the fiscal year FY23, which has just started.

That brings us to the most important question, what does CPI inflation at 6.95% mean for RBI stance and future rate policy? RBI avoided rate hikes in Apr-22 policy as it still wanted to keep the environment conducive to recovery of industrial growth.

That is, in a way, borne out by the IIP data, which has shown a reluctance to grow above the pre-COVID levels. However, the bigger challenge to the RBI may come from the external environment.

Here is why the road ahead will be a lot tougher. The US Fed hiked rates by 25 bps in March and plans another 50 bps hike in May 2022. In short, rates will be closer to 2.25% by end of 2022.

The longer RBI maintains its dovish stance, the more it risks monetary divergence. Going ahead, with US inflation at 8.50% and India inflation at 6.95%, controlling inflation has to be the theme of monetary policy. RBI will have to converge sooner than later.

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