Macroscope – CPI Inflation (February 2021)

What Is The Latest Reading?

India’s retail inflation rose after falling for three consecutive months, registering 16-month low figure in the last month. Inflation came in at 5.03% in February 2021 vs 4.06% in January 2021, staying in-line with RBI tolerance level for third consecutive month. Core CPI jumped to 5.59% after remaining unchanged at 5.33% in last two months. Reading is similar to Nov’2020 data, when core inflation recorded ~two-year high figure at 5.51%.

March 2021 marks the end of the current inflation targeting framework. As of date, retail inflation has remained above RBI’s target of 4(+/-2)% band for eight months in current fiscal year. An expanding inflation and contracting industrial activity serves as a double whammy to economic recovery, underlining its fragility vis-à-vis covid crisis.

Element Inflations

Analyst Commentary

The rise in inflation can be credited to sharp upticks witnessed in food, petrol and diesel. Rising commodity prices, demand and pricing power cite upside risks to inflation readings in near-term.

High base-effect coming into play in later part of this year can see inflation paint benign figures.

This can lead to misguiding of real inflation figures in H1CY2021.

The uptick in food basket can be attributed to price rise in oil, and pulses & products. Crude oil (WTI) prices surged on the hopes of an improvement in demand due to COVID-19 vaccinations.

Declining crude oil inventories in U.S., tighter supplies from OPEC, and rising govt. taxes, further supported oil prices to reach its pre-pandemic level, thus adding to inflation level.

As pressures on perishable food prices ready for a go on the downside, other factors such as increased input and output costs, and higher labor charges can dampen hopes of drop in inflation in coming times.

Core-inflation is expected to chart a similar trajectory as demand-side factors continue to battle the covid brunt.

In last bi-monthly monetary policy meeting, the central bank kept its key interest rates unchanged while maintaining its accommodative stance. Continuing to focus on growth via polices and packages, RBI is to use an arsenal of unique liquidity and similar supportive strategies to maintain current pace of expedited growth.

Broad-based domestic and global economic recovery should improve aggregate demand, posing an upside risk to inflation. Appreciating rupee and any risk of new covid-strain led slowdown, will be a tailwind for CPI inflation.

It is likely for RBI to remain on pause in April meet and consider rate-cuts in near future after efficacy in transmission of prior rate-cuts.

Click here to read MoSPI’s original press release on “New CPI For February, 2021”