March inflation rises to four-month high of 5.52% due to food, core prices

The development may prevent RBI's monetary policy committee from cutting policy rates unless growth really takes a hit due to regional lockdowns in 2021-22, experts say

The retail price inflation rate rose to a four-month high of 5.52 per cent in March due to upward movement in core as well as food rates, barring vegetables and cereals. This may prevent the central bank's monetary policy committee (MPC) from cutting the policy rates unless growth really takes a hit due to regional lockdowns in 2021-22, experts say.  

The consumer price index (CPI)-based inflation rate had stood at 5.03 per cent in February, 2021 and 5.84 per cent in March, 2020.  

The average inflation rate in 2020-21 rose to 6.18 per cent compared to 4.76 per cent in the previous year. The average inflation rate could fall to around five per cent in the current financial year, according to MPC estimates.

While food inflation rate rose to 4.94 per cent in March from 3.87 per cent in the previous months, prices of veggies and cereals declined. While prices of vegetables fell by 4.83 per cent in March compared to 6.27 per cent in the previous month, those of cereals moved down by 0.69 per cent from 0.35 per cent.  

Fruits saw inflation rate rising to 7.86 per cent in March from 6.28 per cent in the previous month.

On the other hand, the inflation rate in nov-vegetarian items remained elevated even as it declined in eggs. Meat and fish saw the rate rising to 15.09 per cent in March from 11.34 per cent in the previous month. On the other hand, eggs saw the rate declining to 10.60 per cent from 11.13 per cent.

Prices of sugar continued to see a fall, while the inflation rate in spices declined.

Aditi Nayar, principal economist, Icra, said,"Despite a month-on-month drop in food prices, driven by vegetables, egg, spices, cereals and sugar, inflation for food and beverages hardened in March due to the base effect. A reversal of the base effect and the decline in prices of vegetables such as onions are expected to dampen food inflation to 2-2.5 per cent in April."

Fuel and light inflation rate was up at 4.5 per cent from 3.53 per cent. It is difficult to gauge inflation rate in petrol and diesel because indices for March 2020 aren't available. However, it seems they rose in March 2021 from February 2021. Inflation rate in petrol had risen to 20.67 per cent in February from 12.53 per cent the previous month and in diesel to 22.57 per cent from 12.79 per cent. In March, the index for petrol rose to 129.3 points compared to 126.1 points in February and in deisel to 179.2 points from 173.8 points.

Also, the inflation rate in transport and communication rose to 12.55 per cent in March from 11.36 per cent in the previous month which also indicate that at least diesel inflation went up over this period.

Among core segments, health services saw a slight dip in the inflation rate to 6.17 per cent from 6.33 per cent. Health inflation rate has been rising in previous months. However, overall core inflation rose to six per cent from 5.9 per cent.

Sreejith Balasubramanian, economist at Fund Management, IDFC Asset Management Company, said,"It is to be seen how the ongoing second wave of Covid infections impact both supply and demand sides of prices compared to last year, in addition to input price pressures. However, the continued fall in vegetable and cereal prices into April and the favourable base effect ahead could drive the fall in inflation."

Nayar said the rate cuts appear to be ruled out, unless economic activity undergoes another deep Covid-induced disruption. However, even in the latter situation, supply disruptions may cause inflation to spike, limiting the extent of the monetary policy support that may plausibly be forthcoming, she said.

"Simultaneously, early rate hikes seem rather unlikely, with the average retail inflation expected to remain below the six per cent upper threshold of the MPC's medium-term target range. Therefore, we maintain our view of an extended pause in the repo rate through 2021, and in the reverse repo rate during H1 FY'22," she said.

Krupesh Thakkar, head of the department of financial markets at ITM B-School, said till the CPI is within RBI’s upper cap of six per cent , there should be no over worries. "But if the CPI hovers above it, then as mentioned by RBI in its Currency and Finance report, ‘tolerance of 6%-plus inflation can be harmful to growth’. Till that time supporting growth would be the priority.”