CPI dropped in January to 3.2% from 3.4% in December, but it is likely to rise in February.
Consumer price inflation is likely to rise in February for the first time since demonetization and this could prompt the RBI to hike rates much sooner than most expect, says a report.
According to a report by Capital Economics, consumer price inflation dropped in January to 3.2% from 3.4% in December, but is likely to rise in February.
"We think that forthcoming data will show that the CPI rate edged up in February to 3.5%," the report said, adding that "we expect February's WPI data to show that the headline rate rose again last month to 6%".
According to Capital Economics, since inflation is likely to accelerate towards the upper band of RBI's target range this year, this may nudge the Reserve Bank to hike rates sooner than expected.
"The RBI has signalled the end of its loosening cycle, but we remain comfortable going one step further in our view that the central bank will have to reverse course and begin hiking rates over the next 12-18 months as its long-term inflation target comes under pressure," it said.
The Reserve Bank in its policy review meet on February 8 kept key interest rate on hold at 6.25% and said it is waiting for more clarity on the inflation trend and impact of demonetization on growth.
The next meeting of the MPC is scheduled for April 5-6.
The likely rise in food inflation in February is because of stoppage of price discounting. Moreover, fuel price index also suggests that there was a further rise in transport inflation in February.
"Looking ahead, there are reasons to think that inflation will continue to accelerate," the report said, adding that food inflation should further edge up as the effect of demonetization on prices wears off.
Moreover, unfavourable base effects caused by the drop in food prices in the second half of last year will also impact food inflation from July onwards, it added.
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