Capital Economics, an independent macroeconomic research house, in its latest report has said that the consumer price inflation declined in January to 3.2 per cent from 3.4 per cent in December, but is expected to rise in February for the first time since note ban. Therefore, it also said that this may nudge the Reserve Bank of India (RBI) to hike rates much sooner than expected.
According to the report, CPI rate in the upcoming data is likely to edge up to 3.5 per cent in February and adding that February’s WPI data is expected to show that the headline rate rose again last month to 6 per cent. It further said that the central bank has signaled the end of its loosening cycle, but they remain comfortable going one step further in their view that the RBI will have to reverse course and begin hiking rates over the next 12-18 months as its long-term inflation target comes under pressure.
The report said that the likely rise in food inflation in February is due to stoppage of price discounting and however added that food inflation should further edge up as the effect of note ban on prices wears off. It added that fuel price index also suggests that there was a further rise in transport inflation in February. Meanwhile, on February 8, the Monetary Policy Committee (MPC) of the RBI, headed by Urjit Patel, unanimously decided to hold the key repo rate at 6.25 percent and said it is waiting for more clarity on the inflation trend and impact of demonetisation on growth. The next meeting of the MPC is scheduled for April 5-6.