At 8.1%, Feb retail inflation likely to delay rate cut further

Tags: News
Retail inflation continued at an uncomfortable 8.1 per cent in February, dashing hopes of interest rates coming down anytime soon.

Though inflation for consumers moderated slightly from 8.79 per cent in the previous month, there seems to be little respite for people with fixed income in both rural and urban areas.

High consumer prices are bound to detract from the ruling UPA’s performance in the runup to the next month’s general election.

Food inflation held at 8.57 per cent on the back of higher prices of milk products, cereals, vegetables and fruits. But it dropped steadily from 9.90 per cent in the previous month.

Prices of non-food items like clothing, bedding and footwear grew 9.22 per cent, hitting the salaried class.

Cereals were dearer by 9.93 per cent, while prices of eggs, fish and meat rose by 9.69 per cent. Milk products got dearer by 10.37 per cent, vegetables by 14.04 per cent and fruits by 15.79 per cent.

High retail inflation of over 10 per cent during the past two years hurt the middle and lower-middle income groups the most. This has been much higher than the Urjit Patel panel’s recommendation for targeting consumer price inflation at 4 per cent with a two per cent plus or minus band.

In a bid to ease inflationary pressure, Reserve Bank governor Raghuram Rajan has raised interest rates three times since September last year despite economic growth languishing at a decade low of 4.5 per cent. GDP growth has been projected at less than 4.9 per cent this fiscal. RBI will review its monetary policy on April 1.

Aditi Nayar, senior economist at independent rating agency Icra, said: “elevated retail inflation is unlikely to set the stage for monetary easing in the immediate term.”

Villagers faced the larger brunt of retail inflation at 8.51 per cent, while city dwellers saw prices spurt by 7.55 per cent in February.

While the second advance estimate of crop production has indicated a record-high rabi harvest of most major crops, recent rainfall has damaged crops over several parts of the country. This is likely to arrest the recent decline in food prices.

Additionally, the inherent demand-supply gap and supply chain inefficiencies are likely to result in food inflation remaining sticky over the course of this calendar.

Early predictions of an unfavourable monsoon pose threat to moderation in retail prices through the year. However, abundant stocks of food grains in government godowns should help the government manage storage and supplies. Many analysts do not see easier interest rates until July-September.

Bhupali Gursale, economist at Angel Broking, said, “We expect RBI to maintain status quo on monetary policy rates in its forthcoming April policy review and until there is a sustained downtrend in headline CPI inflation below the 8.0 per cent level.”

The Confederation of Indian Industry (CII), however, hoped that the slight moderation in consumer level inflation in February “…should spur RBI to give predominance to growth and cut interest rate in its forthcoming monetary policy as the negative growth of capital and consumer goods, especially consumer durables, reinforces the view that escalating interest cost is impeding investment revival.”

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