India's retail inflation surged to a 17-month high, breaching the Reserve Bank of India’s (RBI) upper tolerance limit of 6% for the third month in a row.

Led by food items, the consumer price index (CPI) inflation at 6.95% in March was the highest since October 2020. The figure in February was 6.07%.

The latest inflation data, released by the National Statistical Office, does not capture the continuous rise in fuel prices since March 22. Inflation, thus, may remain elevated in the coming months as well.

While crude oil prices have climbed to a 14-year high, India has felt inflationary pressures even prior to the war in Ukraine due to the coronavirus pandemic and supply chain disruptions.

India’s inflation averaged 6.3% in January-March. As per the RBI’s forecast, the average CPI inflation would be at 6.3% in April-June and 5.8% in July-September.

Oil and fats recorded the largest sequential price increase among food items, putting pressure on the government to make edible oils cheaper.

The RBI has for long put growth ahead of inflation as its main focus area. It was only in its latest monetary policy that the central bank put inflation before growth. “In the sequence of priorities, we have now put inflation before growth. Time is appropriate to prioritise inflation ahead of growth,” RBI Governor Shaktikanta Das had said while announcing the bi-monthly credit policy on April 8.

Health inflation is a matter of concern. “We have been pointing out that the health and household goods/services inflation is turning structural because in the last 15 months, health inflation has been in excess of 6% and household goods services inflation in excess of 5% in the last 10 months. Going forward, with an increase in cost of essential medicines from April 2022, health inflation is likely to exert further pressure on retail inflation,” said Sunil Kumar Sinha, principal economist at India Ratings and Research.

Core inflation - or inflation excluding the volatile food and fuel items - rose to a 10-month high of 6.29% in March.

"With the MPC (monetary policy committee) having signalled an imminent stance change, the rate hike cycle may begin as early as June 2022, if the next CPI inflation print doesnt significantly cool off from the March 2022 level. We now expect to see 50-75 bps of rate hikes by the end of Q2 FY2023, followed by a pause in H2 FY2023, and perhaps another 50 bps of hikes in FY2024," said ICRA chief economist Aditi Nayar.

"With the CPI inflation surging in March 2022, we expect the 10-year G-sec yield to cross 7.2% imminently. With dimming hopes of early bond index inclusion, the 10-year G-sec yield could test 7.5% in H1 FY2023," she added.