RBI Claims Inflation Is "Sticky," Does This Mean Another Increase in the Repo Rate?

RBI Claims Inflation Is "Sticky," Does This Mean Another Increase in the Repo Rate?

The Reserve Bank of India (RBI) observed in its State of the Economy report that although retail inflation decreased to 6.44 percent in February from 6.52 percent the month before, it is still high and has fueled rumours of a potential impending increase in the repo rate.

The study takes on significance in front of its monthly Monetary Policy Committee (MPC) meeting, which will take place from April 3–6 and will focus on the nation's inflation condition.

The latest analysis agrees with RBI's statement that its most recent repo rate increase on February 8, 2023, might not be the final.

"Consumer price inflation is strong, and core inflation continues to defy the clear softening of input costs," the central bank stated in the report.

Core category and gasoline prices grew by 41 basis points and 5 basis points in a month, respectively, according to the consumer price index (CPI), which tracks changes in the prices of a representative basket of products and services.

The RBI credits a favourable base effect of 24 bps in February, which helped decrease headline inflation by 8 bps between January and February, for the small cooling off in inflation.

In spite of economic challenges around the world and worries about a recession, the study observed that India had recovered stronger from the pandemic years and had been growing steadily since the second quarter. The central bank might raise its repo rates in response to the growth expectation.

"The total increase is still solid notwithstanding a recent reduction in credit growth. According to the geographical distribution of bank branches, urban branches, which account for over 60% of bank loans, lead the lending expansion.

Food Price Growth

Inflation in the food industry was somewhat higher in February than it was a month earlier, at 6.3%. Cereal costs increased by 16.7%, reaching their highest level since June 2013. Other significant sub-groups, including prepared meals, milk, fruits, sugar, and non-alcoholic beverages, also experienced increasing inflation. The cost of edible oils, however, decreased.

Despite open market sales by the Food Corporation of India (FCI) that reduced wheat costs, cereal prices increased. March could yet experience this chilly influence. Prices for vegetables and cereals declined in March, with the exception of red lentils, according to price statistics.

Despite rural inflation being 6.72 percent in February, the gap between urban and rural inflation decreased from 85 to 62 basis points. While Chhattisgarh, Delhi, Goa, Himachal Pradesh, and Manipur witnessed inflation below 4%, Andhra Pradesh and Telangana saw higher inflation of 8%.

Global projections indicate that the Fed may only raise rates by 25 basis points (bps), down from the 50 bps initially anticipated, in light of recent bank failures. Any rate increase, though, might persuade the RBI to do the same. The rate at which the RBI loans to commercial banks is called the repo rate, and it is currently 6.50 percent.