RBI likely to maintain status quo after food inflation keeps Feb print high, say experts

• High vegetable inflation, driven by hardening onion prices, has kept food inflation at 8.66% in February.
• With low reservoir levels in many states, food inflation in FY25 is expected to be driven by monsoons, say experts.
• The RBI is focused on bringing inflation below 4% and might continue the status quo for a longer time now, believe experts.
  

In February, retail inflation came in on expected lines at 5.09%. However, high vegetable inflation, driven by hardening onion prices has kept food inflation up at 8.66%. Experts now believe that the Reserve Bank of India (RBI) which has been focussed on bringing inflation to 4%, will maintain the status quo in the upcoming credit policy.

“We expect inflation to average 4.8% in FY25. Given that the RBI Governor has been highlighting the aim of getting inflation to 4% on a durable basis, the policy rates are likely to be kept on hold in the upcoming policy meeting, with no change in stance,” said Rajni Sinha, chief economist, CareEdge Ratings.

Regulator to continue cautious stance

Despite expectations from the market, the RBI has maintained its ‘withdrawal of accommodation’ stance in the last policy meeting in February. This policy, aiming to curtail inflation further, entails a reduction of easy money supply in the system, which started during the initial COVID-19 phase. RBI governor Shaktikanta Das had also earlier spoken about the risk of food inflation spilling into broader inflation.

“We retain our view that RBI will remain cautious on volatile food inflation trajectory and hence prefer to remain in pause mode on rates till August policy. However, with RBI already having continuously fine-tuning liquidity and easing overnight rates closer to the repo rate, we see room for a shift in stance in the June policy,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.

Agrees Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Asset Management, “We anticipate the regulator to maintain a cautious stance. We think RBI would rather continue with stability priority and continue maintaining the 4% inflation target as sacrosanct, and hence we do not see a premature easing from RBI.”

Vegetable inflation zooms, pulses in a tough zone

Vegetable inflation came in high at 30.3% in February, and experts believe that pricey onions will keep food inflation elevated. Inflation in pulses, spices and eggs also saw double-digit inflation. Edible oils and fats have brought down inflation to an extent with negative growth. The food basket has nearly 50% weightage in the consumer price inflation (CPI) data.

“Inflation is purely a food inflation-driven phenomenon which will continue to pressurise inflation in the coming months. Besides, horticulture output this year is expected to be lower than last year. Cereals, eggs, sugar, spices and pulses are the other pain points here,” comments Madan Sabnavis, chief economist at Bank of Baroda.

The outlook for food prices is also bleak with lower reservoir levels and their impact on agricultural output.

“The ongoing high inflation in specific food categories, including cereals, pulses, spices, and vegetables pose a risk of potentially broadening price pressures and de-anchoring inflationary expectations. Reservoir levels, particularly in eastern and southern India, persist at lower levels. Consequently, the forthcoming monsoon in FY25 holds significant importance for the trajectory of food inflation,” said Sinha.

Core inflation has however remained soft, staying below the 4% threshold for three consecutive months. Rural inflation came in higher at 5.3%, while urban inflation is at 4.8% — mostly due to higher weightage of food products in the former index.

Twelve of India’s 22 states saw inflation of above 5.1%. Odisha had the highest at 7.6%, while Delhi saw the lowest at 5.3%.