Official data released on Friday showed inflation, as measured by the consumer price index, rose an annual 5% in February, from 4.1% in January. The food price index rose 3.9% during the month from nearly 2% in the previous month. Urban inflation rose to 6%, widening the gap with rural inflation which was at 4.2%.
The swift return of price pressures after two months of easing has once again raised fresh worries about the trajectory of inflation against the backdrop of global commodity prices.
The impact of strengthening prices was evident across segments. Oils and fats rose an annual 20.8% in January, due to a combination of factors such as rising domestic demand, lower supplies and increase in global prices.
Interest rates cannot be lowered unless fuel taxes are cut: Experts
Prices of pulses and products shot up by nearly 13%. The increase has been attributed to lower output and supply constraints, both locally and globally.
Transport and communication prices rose 11.4% largely due to increase in fuel and transport prices. Meat and fish prices went up by 11.3%, while egg prices shot up an annual 11.1%.
Vegetables prices contracted by 6.3% due to fresh arrivals. Core inflation, excluding food and fuel, shot up to a 28-month high of 5.8% during the month, highlighting the price pressure.
Economists said unless fuel taxes are cut sharply, lurking prices are likely to rule out any cut in interest rates for now. The RBI has paused its rating cutting cycle in the face of rising price pressures but has vowed to maintain an accommodative stance to help the recovery.
“With crude prices increasing, all eyes are on the government’s taxation policy, which will have implications not only for inflation but also on the fiscal deficit and current account,” Sunil Kumar Sinha, principal economist at India Ratings said in a note.
Separate data showed surprise deterioration for the industrial sector. Industrial production contracted 1.6% in January dragged down by decline in manufacturing, mining, capital goods, consumer durables and non-durables sectors. The surprise contraction came after the sector posted a upwardly revised growth of 1.6% in December. The manufacturing sector contracted 2% during the months while the capital goods segments fell 9.6% in January compared to a contraction of 4.4% in the year earlier period.
After the rapid recovery seen till October 2020, the trend in the IIP has turned volatile in the last three months, suggesting that the economy has entered into a consolidation phase with an underlying momentum that is relatively subdued.
Economists said they expect weakness to persist in the crucial sector. Some economists said the rollout of vaccinations may add to confidence in the months ahead. “The trend in the IIP has turned volatile in the last three months, suggesting that the economy has entered into a consolidation phase with an underlying momentum that is relatively subdued, said Aditi Nayar, principal economist at ratings agency ICRA.