India's Inflation Surges to 18-Month High in April

India's retail inflation is expected to surge to an 18-month high of 7.5% in April, driven by rising fuel and food prices. The Reserve Bank of India has hiked its repo rate to 4.40% to curb inflationary pressures.

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Bijay Laxmi
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India's Inflation Surges to 18-Month High in April

India's Inflation Surges to 18-Month High in April

India's retail inflation is expected to have surged to an 18-month high in April, driven by rising fuel and food prices, according to a Reuters poll of 45 economists. The inflation rate is likely to have reached 7.5% on an annual basis, up from 6.95% in March, and well above the Reserve Bank of India's (RBI) upper tolerance limit of 6%.

Why this matters: The surge in inflation has significant implications for India's economy, as it can lead to higher interest rates, reduced consumer spending, and slower economic growth. Moreover, if left unchecked, high inflation can erode the purchasing power of the Indian rupee, affecting the overall standard of living of the population.

Several key factors have contributed to the surge in inflation. Rising fuel prices, which were hiked after key state elections in March, have played a significant role. Food inflation, which accounts for nearly half of the consumer price index (CPI) basket, reached a multi-month high in March and is expected to remain elevated due to higher vegetable and cooking oil prices globally. Additionally, the local price of oil, India's biggest import, has been subject to upward pressure from the roughly 4% drop in the rupee this year.

Experts have weighed in on the situation. "CPI inflation appears to have surged higher still in April on the back of higher food and fuel prices. The bulk of the impact of the recent fuel prices hikes will be felt in April," said Shilan Shah, senior India economist at Capital Economics. Shah added, "We wouldn't be surprised if core inflation has risen too. The risk is that sustained higher inflation drives up inflation expectations, which push core inflation even higher."

The elevated price outlook has already pushed the RBI to hike its repo rate for the first time since 2018, lifting it 40 basis points to 4.40% in a surprise unscheduled meeting last week. More rate hikes are expected to follow, with some economists predicting that inflation could remain above the RBI's target band for three consecutive quarters.

Wholesale price inflation was predicted at 14.48%, continuing its double-digit streak for a year. The inflation data is due to be released on May 12 at 1200 GMT.

Looking ahead, investors are awaiting the Consumer Price Index (CPI) numbers, scheduled to be released on May 13, 2024, which are expected to influence market sentiments in the coming week. India's retail inflation is anticipated to remain steady at around 4.8% in April 2024, following a slight decline in March due to lower gasoline prices. The projected inflation rate is still below the upper limit of the RBI's inflation target of 4% (+/-2%).

Several factors are expected to influence inflation in the coming months. Seasonal food price increases may be partially offset by lower retail gasoline prices in March 2024, which could spill over into April 2024 data. The favorable base effect is also expected to mitigate the impact of rising food prices in April 2024. Core inflation, excluding food and fuel, is anticipated to maintain its recent trend of moderation.

RBI Governor Shaktikanta Das expressed concerns about food inflation volatility during the April 2024 monetary policy meeting, highlighting the inflation trajectory's susceptibility to supply-side disruptions. Pressures are expected to mount for perishable food items, such as vegetables, with the arrival of summer. The India Meteorological Department's forecast for an above-normal monsoon could bring relief, but potential challenges and uncertainties in weather patterns and geopolitical risks might impact the inflation outlook.

India's inflation surge to an 18-month high in April has raised concerns among policymakers and economists alike. The RBI's proactive stance in hiking interest rates is aimed at curbing inflationary pressures, but the path ahead remains uncertain. As the country navigates through domestic and global challenges, the upcoming inflation data will be closely watched by investors and market participants.

Key Takeaways

  • India's retail inflation expected to surge to 18-month high of 7.5% in April.
  • Rising fuel and food prices drive inflation, above RBI's 6% upper tolerance limit.
  • Inflation surge may lead to higher interest rates, reduced consumer spending, and slower growth.
  • RBI hikes repo rate to 4.40%, more rate hikes expected to curb inflationary pressures.
  • Upcoming inflation data to be closely watched by investors and market participants.