Record high temperatures in Feb may lead to more rate hikes from RBI, says India Ratings

The record heat in February can lead to more rate hikes from RBI, a domestic rating agency said on Tuesday.

The high temperatures will impact the wheat production, the rating agency said, adding that the surge in wheat prices contributed to over a tenth of the retail inflation in December and January, which is way above their weight in the basket.

Earlier in the day, the Met office said February 2023 has been the warmest in 122 years and asked everybody to brace for more heat waves going forward.

In a note shared before the release of the IMD data, India Ratings said the country would again undergo a “terminal heat stress”, pointing out that on an average, the maximum temperature in Punjab, a key wheat-growing area, was 4 to 5 degree Celsius higher than the normal between 17-23 February.

Also Read | Centre warns states as India sees hottest February since 1901

It said the 'terminal heat stress' may result in the wheat output falling to 107.7 million tonnes (MT) as against the second advance estimate of 112.2 MT, thus increasing prices.

The agency said after the last policy review, where RBI had hiked rates by 0.25 per cent to 6.50 per cent, many watchers expected a pause in the increases which began in May 2022. The RBI has increased the key repo rate by 2.5 per cent in consecutive hikes to tame inflation.

“…two developments since the February 2023 monetary policy committee have cast shadow on this expectation (of a pause)… pause on the policy rate may not be a done deal yet,” the rating agency note said.

Apart from the decline in wheat production, the agency expects an uptick in vegetable prices and stickiness in core inflation to cloud the outlook on inflation.

It said the vegetables prices will begin to harden with the onset of summer and their contribution to CPI to turn positive, after two consecutive months of negative contribution.

In December and January, the deflation of 18 per cent and 11.5 per cent from vegetable prices was more than offset by the inflationary pressures emanating from cereals especially wheat, protein-based food items and spices, the agency said.

On the positive side, the stabilisation of global commodity prices in combination with the base effect may still check the upside of inflation, and it expects the retail and wholesale inflation to average 5.4 per cent and 1.1 per cent, respectively, in FY24.