Inflation rises to 3.65% in February

Reversing a six-month downward trend, retail inflation as measured by the consumer price index (CPI) accelerated to 3.65% in February from 3.17% a month ago as food prices gains quickened.

Data released by the Central Statistics Office showed food price inflation accelerated in February to 2.01% from 0.61% on the back of higher prices of fruits and fuel items. Vegetable prices continued to fall in February.

The Reserve Bank of India in its last monetary policy review in January surprised the markets by holding policy rates unchanged and shifting its stance from accommodative to neutral, blaming stubborn nonfuel, non-food inflation.

In its policy statement, RBI had said excluding food and fuel, inflation has been unyielding at 4.9% since September.

“While some part of this inertial behaviour is attributable to the turnaround in international crude prices since October— which fed into prices of petrol and diesel embedded in transport and communication—a broad-based stickiness is discernible in inflation, particularly in housing, health, education, personal care and effects (excluding gold and silver) as well as miscellaneous goods and services consumed by households,” it said.

“Going forward, to work for bringing down inflation below 5% on a durable basis requires ex-food, fuel inflation also to come down,” RBI governor Urjit Patel said after the customary post-budget address by finance minister Arun Jaitley to the central board of the RBI last month.

Data released earlier during the day showed wholesale price inflation accelerated to an over three-year high at 6.55% in February from 5.25% a month ago, because of a rise in prices of rice, fruits and cooking gas.

A Bloomberg analysts’ poll had projected CPI at 3.6% and WPI at 6.1% for February.

In a paper detailing the preliminary assessment of the macroeconomic effects of demonetization, RBI on Tuesday said that the impact of demonetization on inflation in the near-term stemmed mainly from moderation in food inflation, especially perishables, as inflation excluding food and fuel remained broadly unaffected.

“With demand expected to recover from the latter part of Q4 of 2016-17, inflation risks to CPI excluding food and fuel and headline inflation are, therefore, tilted to the upside,” it added.

Upasna Bhardwaj, a senior economist at Kotak Mahindra Bank, said higher-than-expected CPI inflation has primarily been led by waning disinflationary food price pressures.

“Going forward, the surge in WPI inflation on the back of high food prices and pickup in commodity prices continues to provide a floor to future retail inflation trajectory even as positive base effect may keep the headline inflation benign,” Bhardwaj added.

Aditi Nayar, principal economist at rating agency ICRA Ltd, said the continued seasonal uptrend in prices of perishables is likely to outweigh the persisting fall in prices of pulses, contributing to a further hardening of food inflation in March 2017.

“However, the sharp correction in crude oil prices witnessed over the last week would douse minerals inflation in March 2017, restraining headline WPI inflation at around 6.0% in that month,” she added.