With inflation rising again, the likelihood of interest rate hikes increased

- With the arrival of Rabi crop, the calculation of reduction in the price of food grains will be correct, right?

Inflation based on the Consumer Price Index rose to a three-month high of 6.52 percent in January. With this, the rate has crossed the Reserve Bank of India's range once again and this has surprised most analysts. The main reason for this increase was the rise in food prices, especially food grains, which increased by 16.1 percent year-on-year. Foodgrain prices have increased by 2.6 percent on a monthly basis. The weightage of food grains and other products in the composite consumer price index basket is 9.67 percent. Headline inflation has also picked up marginally and remained above 6 percent.

There is also some difference in understanding the statistics. For example, Nomura said in a note, 'Using official data, we found that there is wide variation in the top grain index (from top to bottom) and its components (from bottom to top). The official method is more complicated. But so far both estimates are consistent.

The gap in the data reading may close over time, but January's inflation data has put the RBI's current forecast for the current quarter at risk. The central bank recently cut its inflation forecast for the January-March quarter by 20 basis points to 5.7 percent. The big question in such a situation is what will be the impact on monetary policy? To be precise, the Monetary Policy Committee in its meeting last week raised the policy repo rate by 25 basis points to a four-year high of 6.5 percent.

The Monetary Policy Committee has also left open the option of further rate hikes in the future. The committee did not indicate that it would maintain policy rates at current levels. However, most market participants expected this.

The central bank has also predicted the average inflation rate to be 5.3 percent in the year 2023-24. It has to be seen that there is no risk of it going beyond the upper limit again.

It may be noted that many market economists estimate that the inflation rate in the next financial year will be lower than the Reserve Bank's estimate. Clearly, if inflation continues to rise, monetary policy will have to be tightened to control the situation. The MPC will have more data before its April meeting and its action will depend on two key factors.

First, how will this rise in inflation affect the likely outcome of inflation in 2023-24? The Monetary Policy Committee wants to scrutinize the January and February inflation data to see if food prices will soften with the arrival of the rabi crop, though the pressure will continue, the committee will have to answer.

Another factor affecting rate action will be the desired level of real policy rates. Although the central bank may not talk about it openly, the rate could be higher than earlier estimates.

The Reserve Bank has expressed concern over persistently high core inflation, but persistently high top rates will further complicate matters. January's higher headline inflation rate added to policy uncertainty. This raises the possibility of another rate hike in April.