Retail inflation soars sharply to 6.95% in March on the back of rising food prices

This is the third straight month in which the inflation measured by the consumer price index has clocked above the RBI’s upper end of tolerance band. The RBI has the mandate to maintain inflation at a medium-term target of 4% with an upper tolerance level of 6% and lower tolerance level of 2%.

The food inflation soared to 7.68 per cent in March from 5.85 per cent in February.

“The CPI inflation shot up well beyond our expectations, touching a 17-month high of 6.95% in March 2022, led predominantly by a sharper than anticipated surge in some components of food and beverages such as meat and fish. Most other components printed broadly in line with our forecasts, suggesting that a gradual pass through of the commodity price pressures has commenced,” Aditi Nayar, chief economist, ICRA said.

She sees a rate hike beginning from June if the next inflation print doesn’t cool off significantly.

“With the MPC having signalled an imminent stance change, the rate hike cycle may begin as early as June 2022, if the next CPI inflation print doesn’t significantly cool off from the March 2022 level. We now expect to see 50-75 bps of rate hikes by the end of Q2 FY2023, followed by a pause in H2 FY2023, and perhaps another 50 bps of hikes in FY2024,” Nayar added.

The repercussion will immediately be felt in the bond market where the yields, already at record highs, are set to harden.

“With the CPI inflation surging in March 2022, we expect the 10-year G-sec yield to cross 7.2% imminently. With dimming hopes of early bond index inclusion, the 10-year G-sec yield could test 7.5% in H1 FY2023,” Nayar stated.

The RBI, in its latest monetary policy review, has revised upwards its inflation projection to 5.7% from 4.5% earlier on the back of hardening of oil and commodity prices globally.

The RBI, which till now kept its focus on growth, has now shifted its attention to inflation and withdrawal of its accommodative stance.

A Reuters poll had projected the inflation rate at 6.35% for the month of March on the back of hardening of food prices.

The report said that the full impact of rise in fuel prices will reflect in the April inflation print.