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Will Food inflation plays spoilsport?
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Retail inflation data for March will be one of the two new inflation prints available to the RBI's MPC when it meets next in early June. CPI data for which is scheduled to be released at 5:30 pm today, is seen inching up to 2.8% in March from 2.57% the previous month.  Given food inflation, or the lack thereof, it is not surprising to see economists forecasting only a minor increase in the headline rate. Even the RBI seemed to exude confidence last week, lowering its CPI inflation forecast for Jan-Mar by 40 basis points to 2.4%, indicating that it expects headline retail inflation to ease to around 2.7% in March. 

But what if food inflation plays spoilsport from now on? 
 
In February, the food price index rose month-on-month for the first time in six months, while food price inflation, at (-)0.66%, was at its highest since September. Of course, it clearly still remains in negative territory. 
 
Could this deflation finally end in March? Possibly. In February, the food price index had risen month-on-month even though retail prices of potato, onion, and tomato had fallen 5-13% from January. By contrast, March saw prices of onion and potato falling 4-5%, while those of tomato jumped 10%. 
 
Assuming food prices show concrete signs of a reversal in the next two prints, the MPC will have quite a task on its hand. In the minutes of the February meeting, external member Chetan Ghate had warned of vegetable prices rebounding in Apr-Aug, while Deputy Governor Viral Acharya had pointed out that if food prices were assumed to remain subdued, it would only result in agrarian distress. 
 
This would then "necessitate a political-economy response in the form of fiscal support to the agrarian economy", which we have seen being promised by politicians in the run-up to the General Elections. The end result, Acharya had argued, was not just improved rural demand, but higher headline inflation. 
 
The bottomline, then, is this: it will take nothing short of a rocket attached to the CPI food price index to stop the Monetary Policy Committee from cutting the repo rate further in the next few months.
 

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