Reserve Bank of India (RBI) had projected retail inflation to be 4.5 per cent for the next year. The ongoing geopolitical tensions- Russia-Ukraine war, and resultant supply side bottlenecks would likely to heighten spate of inflation in world and in India too. Therefore, RBI is likely to revise it upwardly.

Higher retail inflation

• The Consumer Price Index (CPI) rose to 6.07 per cent in February, breaching the upper limit- snake is out of tunnel. According to Monetary Policy Committes RBI is mandated to maintain inflation level of 4 per cent with upper tolerance level of 6 and lower limit of 2.
• The rise in retail inflation was broad-based, driven by the rise in prices of food products including cereals, eggs, meat, milk products and vegetables, as well as paan and tobacco, clothes and fuel.
• The wholesale price-based inflation risen to as high as 13.11 per cent in February, marking the 11th consecutive month of double-digit inflation. A sustained and stubborn Wholesale Price Index (WPI) inflation could raise retail inflation as producers are likely to shift the burden to consumers.

Pan world inflationary situation

• Global crude oil and commodity prices have risen significantly since the onset of the Russian invasion of Ukraine and consequent sanctions.
• Global food prices measured by the Food and Agriculture Organization’s (FAO) Food Price Index (FFP) registered a record growthof 20.7 per cent in February. The index tracks monthly changes in the international prices of commonly traded food commodities. The spike in the FFP was primarily driven by a sharp increase in vegetable oil prices. If the war persists, the price of sunflower oil, palm oil and soybean oil could rise further.
• Due to the ongoing geo-political tension disruption in metal trade chain is likel to increase price of aluminium, copper, zinc, lead etc. prices have also spiked due to the ongoing geopolitical crisis.

Grim picture for domestic inflation

• Ninety per cent of India’s total sunflower oil imports come from Russia and Ukraine, which means rising vegetable oil prices would conflagrate into domestic food inflation. The increase in the price of fertilisers could also put upward pressure on to food inflation.
• Rising metal prices would have detrimental effect on raw materials in consumer durables. It could lead to cost-push inflation in India

Implications for monetary policy

• The RBI has been supporting economic growth by reducing rates. In its last monetary policy, the RBI chose not to change policy rates and an accommodative stance to support growth.
• The US Federal Reserve, in its latest policy, raised the interest rate by a quarter percentage point to address spiralling inflation. The interest hike came in after the US CPI accelerated to a four decade-high of 7.9 per cent in February. The Federal Reserve signalled more interest rate hikes by year end. This stand will lead to flight of capital from India, that’s why India’s stock market did not welcome the Fed policy change.