The Reserve Bank of India's (RBI) worst fears have been realised after data showed headline retail inflation surged to 7.79 percent in April - the highest since May 2014.
At 7.79 percent, the Consumer Price Index (CPI) inflation print for April is 84 basis points higher than the March number of 6.95 percent, data released on May 12 by the Ministry of Statistics and Programme Implementation showed.
Inflation was expected to rise sharply last month. However, the print for April is higher than the already elevated consensus estimate, with a Moneycontrol poll showing economists saw inflation rising to 7.5 percent.
Markets have been dreading for the last week what the latest inflation number might be after the Monetary Policy Committee (MPC) voted in favour of a 40-basis-point repo rate hike on May 4 at the conclusion of an unscheduled meeting.
In his statement conveying the decision on May 4, RBI Governor Shaktikanta Das had said inflation was "expected to be elevated" in April.
Food and fuel
The sharp rise in inflation in April was driven by significant price pressures. As expected, fuel items led the charge, with the index for the 'fuel and light' group of the CPI rising 3.1 percent month-on-month in April, resulting in an inflation rate of 10.8 percent.
April saw a big up-tick in fuel prices, with the average pump price of petrol in India's top four metropolitan cities up 8.6-9 percent compared to March. Meanwhile, diesel prices were up 8.8-9.7 percent, according to data from the Petroleum Planning & Analysis Cell, a division of the Ministry of Petroleum & Natural Gas.
The other volatile component of the CPI basket - food - also registered a higher inflation rate of 8.38 percent in April, up from 7.68 percent in March. However, sequential prices pressures for food items as a whole were not as strong as for fuel, with the Consumer Food Price Index 1.6 percent higher in April compared to March.Within food, the strongest price momentum was seen in cereals, oils and fats, and milk.
|APR 2022 INFLATION||CHANGE IN INDEX, APR 2022 vs MAR 2022|
While inflationary pressures from food and fuel items was expected, a third source of risk took charge in April - discretionary items.
Inflation for the 'miscellaneous' group, which accounts for 28 percent of the CPI and includes services, rose by more than a percentage point to 8.03 percent in April from 7.02 percent in March. Consequently, core inflation - seen as an indicator of underlying demand - jumped to 7.0 percent in April from 6.4 percent in March, according to Moneycontrol calculations.
"The surge in the CPI inflation has clearly justified the off-cycle rate hike last week, and significantly raised the likelihood of a back-to-back rate increase in June 2022," said Aditi Nayar, ICRA's chief economist.
"We now foresee a high likelihood that the MPC will raise the repo rate by 40 basis points and 35 basis points, respectively, over the next two policies to 5.15 percent, followed by a pause to assess the impact of growth. As of now, we continue to see the terminal rate at 5.5 percent by the middle of 2023," Nayar added.
Nayar sees a favourable base lowering CPI inflation in May, although it is expected to remain above 6.5 percent.The MPC is scheduled to next meet on June 6-8.