The consumer price inflation data for February released on Thursday may just have decreased the chances of another quick cut in interest rates by the Reserve Bank of India in its upcoming monetary policy announcement on April 7.

In fact, going by present trends, we may be well into the first quarter of the next fiscal before the RBI gets elbow room to consider easing rates again.

Consumer price inflation (CPI) at 5.37 per cent has risen for the second month in a row driven mainly by food prices, especially of vegetables and pulses. Core food inflation has jumped up sharply to 6.79 per cent compared with 6.14 per cent (revised) in January.

The basic premise behind the central bank’s two rate cuts on January 15 and March 4 was data confirming “continuing disinflationary pressures”. The second 25 basis point cut earlier this month was pegged on the expectation of inflation trending lower in the months ahead.

“Softer readings on inflation are expected to come in through the first half of 2015-16 before firming up to below 6 per cent in the second half,” Governor Raghuram Rajan said in his statement on March 4 while elaborating on the RBI’s policy stance.

Rajan is not likely to be pleased by the latest data which contradict his assumption. Worse, inflation could harden further in the next month for the following reasons. First, food prices traditionally rise with the onset of summer and stay high until the monsoon sets in. The sharp rise in food inflation in February is probably a precursor.

Second, the Budget contains some proposals that are inflationary such as the increase in service tax and duties on petrol and diesel; indeed, the oil companies marked up retail prices on the same evening of Budget day. And then there is the increase in freight rates proposed in the railway budget which could drive prices upwards across a host of products.

These are not reflected in February prices but will show up in the current month’s data. What this effectively means is that inflation for March could kick up higher and cramping room for the RBI to ease up further.

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