Record February heat could lead to RBI hiking rates; here is why

The record high temperatures in February are bound to affect wheat output and can lead to further rate hikes from the Reserve Bank of India (RBI), a domestic rating agency has said.

A 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, India Ratings said.

Earlier, the Met office said that February 2023 was the warmest in 122 years and asked everybody to brace for more heat waves.

Terminal heat

India Ratings said the country would again undergo a terminal heat stress.

It pointed 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 February 17 and 23.

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

The agency said after the last policy review, where the RBI hiked rates by 0.25 to 6.50 per cent, many watchers expected a pause in the increases which began in May 2022.

Repo rate

The RBI has increased the key repo rate by 2.5 per cent in consecutive hikes to tame inflation.

Besides the decline in wheat production, the rating 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 the Consumer Price Index (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.

However, the stabilisation of global commodity prices in combination with the base effect may still check the upside of inflation.

It expects the retail and wholesale inflation to average 5.4 per cent and 1.1 per cent respectively in FY24.

(With agency inputs)