India’s retail inflation likely surged to an 18-month high in April, largely driven by rising fuel and food prices and staying well above the Reserve Bank of India’s upper tolerance limit for a fourth consecutive month, a Reuters poll found. The jump has been long anticipated following the Indian government’s decision to wait until after key state elections in March to hike fuel prices. Energy prices globally have soared since Russia’s invasion of Ukraine in late February.
Food inflation, which accounts for nearly half the consumer price index (CPI) basket, reached a multi-month high in March and is expected to remain elevated due to higher vegetable and cooking oil prices globally. These factors likely pushed inflation in Asia’s third-largest economy to 7.5% on an annual basis in April, according to a May 5-9 Reuters poll of 45 economists, from 6.95% in March.
If realized, that would be the highest inflation rate since October 2020 and well above the RBI’s upper 6% limit. Forecasts for the data, due to be released at 1200 GMT on May 12, ranged between 7.0% and 7.85%.
“CPI inflation appears to have surged higher still in April on the back of higher food and fuel prices. The bulk of the impact of the recent fuel prices hikes will be felt in April, ”said Shilan Shah, senior India economist at Capital Economics. “We would not be surprised if core inflation has risen too. The risk is that sustained higher inflation drives up inflation expectations, which push core inflation even higher. ”
To make matters worse, the local price of oil, India’s biggest import, has also been subject to upwards pressure from the roughly 4% drop in the rupee this year, with the currency touching a record low on Monday. Wholesale price inflation was predicted at 14.48%, continuing its double-digit streak for a year.
The elevated price outlook pushed the RBI – which only recently changed its focus to price stability from growth – to hike its repo rate for the first time since 2018, lifting it 40 basis points to 4.40% in a surprise unscheduled meeting last week, with more expected to follow. The move came just ahead of the US Federal Reserve’s 50 basis point rate hike later the same day.
“Inflation could remain above the RBI’s target band for three consecutive quarters, marking the first official ‘failure’ of the monetary framework,” noted Rahul Bajoria, chief India economist at Barclays.