Accelerating cereal, dairy and meat prices are counteracting a seasonal disinflation in vegetable prices. Supply-side measures have, and will, continue to help with food inflation. Sticky core inflation, however, calls for a further tightening of monetary policy that remains accommodative despite a 2.5-percentage-point increase in the policy interest rate and liquidity that is occasionally dipping into deficit.
After the latest rate hike, RBI governor Shaktikanta Das pointed out the repo rate of 6.5%, adjusted for inflation in the October-December quarter, trails pre-pandemic levels. With a resurgence in inflationary pressure, the gap is likely to open up if supply responses deliver less than anticipated results over the next two months.
The central bank will, in any case, have to squeeze demand further to get a grip on core inflation, and chances have increased for another rate action at its April review of monetary policy. Liquidity in the banking system will also need to adjust for a fuller transmission of the policy interest rate. Banks are raising deposit rates, but not fast enough because of excess funds parked with RBI.
The central bank is, however, not very far from its interest rate summit of this upcycle, with declining wholesale inflation pulling down retail and core inflation. Monetary policy acts with a lag and further hikes will be data-driven, now that real interest rates have turned positive after an extended period of ultra-loose credit.
