Imported Price Pressures Dominate; Inflation To Exceed RBI's Target Again: Barclays

Retail inflation in March likely exceeded the RBI's target, once again, driven by higher energy costs, showed a Barclays research note.

Imported Price Pressures Dominate; Inflation To Exceed RBI's Target Again: Barclays

March CPI preview: Imported price pressures dominate, says Barclays

Retail inflation in March likely exceeded the Reserve Bank of India's upper end of the target range, once again, driven by higher energy costs, but the central bank will mostly overlook the rising price pressures as temporary, wrote economists at Barclays in a research note.

Consumer-price indexed (CPI) inflation rose a touch further in February to 6.07 per cent from a year ago, the RBI's upper end of its target range of 2-6 per cent for the second month in a row.

"CPI inflation will exceed the RBI's target range, as rising motor fuel and other energy prices add to inflation even as food prices hold steady. Headline inflation is likely to stay above 6 per cent for the next two to three months. We expect headline CPI inflation to climb to 6.5 per cent year-on-year in March, driven by the pass-through of international commodity and energy prices," wrote economists at Barclays in a research note.

"On a sequential basis, food prices remain under control, but imported inflation, led by higher energy costs, will be the major driver as core inflation hits a 10-month high. Still, the RBI will likely stress supply-side drivers and emphasise the use of fiscal levers to tame price pressures," added the note.

The recent hikes in fuel prices - petrol and diesel prices were raised again on Tuesday for the thirteenth time in 15 days, are also likely to add to already high price pressures in the country.

Fuel rates were held steady for over four months despite the spike in crude oil prices. The rate revision had ended on March 22. In total, petrol and diesel prices have gone up by ₹ 9.20 per litre, respectively, after 13 rate revisions.

"India's food prices will largely be insulated from the Russia-Ukraine conflict. We expect the pass-through of surging international commodity prices to be partial and most visible in motor fuels, edible oils, metals and gold," said Barclays' economists.

"After a hiatus of nearly four-and-a-half months, prices of motor fuels have been incrementally raised over the past two weeks, and we expect more increases in the coming days. While cooking gas prices were unchanged at a retail level, the commercial cylinder cost has continued to climb, while kerosene prices have also risen," added the research note.

But the RBI has, in repeated messages, said it is currently focused on supporting the nascent economic recovery and that rising inflation would be temporary even as the Federal Reserve has indicated an aggressive rate hike path.

The central bank is widely expected to keep its interest rates unchanged and use its communication as a nuance, but calls are growing for it to act. 

While market participants have said the RBI is behind the curve in tackling inflation and would have to take an aggressive stand later, India's policymakers have rejected that idea and said the economy still needs monetary support.

"The RBI to stress supply drivers and transient nature of current price spike. If March inflation is in line with our expectations, Q1 2022 inflation will average 6.2 per cent, which is 50 basis points above the RBI's 5.7 per cent projections made in February. "Our calculations also show that inflation could average 5.1 per cent in FY22-23, with upside risks," noted the economists. 

"Still, the MPC could stress the predominantly supply-side nature of the current price spike and suggest the need for fiscal measures to reign in price pressures. Indeed, the RBI is expected to keep both the repo and reverse repo rates steady and maintain its tone of measured accommodation during this week's policy meeting," added Barclays' research note.