A fiscal pill to cool inflation fever

India’s inflation measured through the consumer price index (CPI) is still running hot. In February, the headline CPI remained elevated at 6.44% year-on-year (y-o-y), breaching the Reserve Bank of India’s (RBI) upper target limit of 6% for the second consecutive month.

- Rupali Sarkar

The elevated headline print in February is led by further uptick in food and beverages inflation while core inflation (CPI excluding food and fuel) also remained sticky. The former rose to a four-month high of 6.26% y-o-y, driven by skyrocketing cereal inflation, which hit a record high of 16.7% y-o-y, offsetting the decline in protein inflation and vegetable deflation.

A headline CPI above RBI’s comfort zone and a sticky core inflation do strengthen the case of an additional rate hike by the central bank in April. But there are limits to how much interest rates can rise before they begin to throttle growth. The transmission of higher borrowing costs has already started to impact business sentiment, particularly in the manufacturing sector. Also, the Silicon Valley Bank collapse shows that the banking system is not immune to such aggressive rate tightening and this would eventually spill over to the economy. Persistently high food inflation raises the question if monetary tightening alone will be enough to tame the inflation beast. In such a scenario, with a supply-side issue, a fiscal response may be needed as well.