Inflation surges to 8-year high, interest rate hike may be on cards

India’s headline inflation galloped for a seventh straight month to touch an 8-year high of 7.79 per cent in April on rising food and fuel prices, raising the odds of an interest rate hike by the RBI early next month to tame prices.With factory output measured in terms of the Index of Industrial Production (IIP) remaining subdued at 1.9 per cent in March, some economists feel that another interest rate hike on the heels of a 40 basis points increase last week may slow economic growth.Retail inflation (CPI) in April soared to a 95-month high on the back of a surge in prices across all major commodity groups. It was way back in May 2014 that CPI inflation was at 8.3 per cent.Led by cereals and products (21 months high), vegetables (17 months high), and spices (17 months high), consumer food price inflation jumped to 8.38 per cent (17 months high), according to data released by National Statistical Office (NSO) on Thursday.The second-round impact of higher fuel prices has started reflecting on other goods and services also.Core inflation, which has remained at more than 5 per cent for 24 consecutive months, in April also touched 95-month high at 6.97 per cent.”Given these trends, the RBI may consider increasing the policy rate further by 50 basis points or more in one or two steps,” said D K Srivastava, Chief Policy Advisory, EY India. “With higher rates, investment and growth may be adversely affected.”WPI inflation has tended to be even higher than the CPI inflation in recent months. It was at 14.5 per cent in March.India Ratings expected monetary tightening to continue and increase in repo rates by 60-75 bps and cash reserve ratio by 50 bps in FY23.RBI had last week raised CRR by 50 bps.IIP growth of 1.9 per cent year-on-year in March was a five-month high and compared with 1.5 per cent in the previous month, according to official data released Thursday.Electricity production recorded the sharpest increase, as it rose 6.1 per cent while mining activity slowed slightly to 4 per cent. Manufacturing activity (the highest weight in IIP) improved marginally to 0.9 per cent.On a year-on-year basis, growth improved for only primary goods, while both consumer durables and non-durables contracted at a slower pace. The growth in remaining sectors moderated from the previous month’s levels.Sreejith Balasubramanian, an economist at IDFC AMC said the upside surprise in the April CPI was driven by food and on the ‘core’ side by housing, clothing and transportation and communication.”Thus momentum in core-CPI, which was already high and sticky throughout FY22, picked up strongly and also reflected the fuel price hikes. The inflation trajectory ahead is likely to be shaped by supply bottlenecks, elevated commodity prices, pickup in core-WPI, and pass-through to consumer prices but also by aggregate demand which remains lackluster.”Inflation has remained above the RBI’s comfort zone of 6 per cent for four months in a row mainly due to the Russia-Ukraine war which has impacted the prices of commodities across the globe.Inflation in the food basket rose to 8.38 per cent in April from 7.68 per cent in the preceding month and 1.96 per cent in the year-ago month, NSO data showed.The rate of price rise in ‘fuel and light’ category in the retail inflation basket quickened to 10.80 per cent in April this year from 7.52 per cent in the preceding month.In the ‘oils and fats’ category, inflation remained at an elevated level of 17.28 per cent (18.79 per cent in March 2022) during the month, as Ukraine is one of the major sunflower oil producers in the world and India imports a major portion of the commodity from the war-ravaged country.Besides, Ukraine is a key supplier of fertiliser to India.Vegetables witnessed an inflation print of 15.41 per cent during the month as against 11.64 per cent in March, the data showed.Notably, retail inflation has remained above 6 per cent since January 2022. The Reserve Bank of India has been mandated by the government to ensure that inflation remains at 4 per cent with a margin of 2 per cent on either side.After the off-cycle Monetary Policy Committee (MPC) meeting of RBI last week, RBI Governor Shaktikanta Das had said the adverse effects of the unprecedented high global food prices due to the ongoing geopolitical situation are reflected in the domestic market as well, and going forward inflationary pressures are likely to continue.Meanwhile, according to sources, the central bank is likely to raise inflation projections in the MPC meeting due next month. It may also consider a rate hike to tame inflation which is above its comfort level.Earlier this month, the MPC raised the key policy rate (repo) by 40 basis points to 4.40 per cent with an aim to tame the rising inflation. It was the first rate hike after August 2018.”The surge in the CPI inflation has clearly justified the off-cycle rate hike last week, and significantly raised the likelihood of a back-to-back rate increase in June 2022.”We see a higher base softening the May 2022 CPI inflation print, although it will remain above 6.5 per cent,” Aditi Nayar, Chief Economist, ICRA said.