India's retail inflation accelerated to a three-month high in February on higher fuel prices, which could challenge the central bank's accommodative stance and record-low key policy rates adopted to boost the pandemic-hit economy.
Annual retail inflation rose 5.03% in February, up from 4.06% in January, and below the 4.83% forecast in a Reuters poll of economists, data released by the Ministry of Statistics showed on Friday.
Retail petrol prices in the national capital New Delhi have gone up by nearly 9% so far this year, while diesel prices are up over 10%, pushed up by higher federal and state taxes, putting pressure on Prime Minister Narendra Modi to cut taxes.
The Reserve Bank of India's Monetary Policy Committee (MPC), which kept the benchmark repo rate unchanged at 4% last month, is expected to keep rates unchanged at its next meeting from April 5-7.
After cutting the repo rate by 115 basis points to sustain the economy during the coronavirus crisis, the central bank has kept the policy rate unchanged since May, 2020.
Analysts said high commodity prices will continue to fan inflation in the coming months.
"The rising global crude prices will continue to add inflationary risks going ahead and CPI (retail inflation) will remain elevated," said Rahul Gupta of Emkay Global Financial Services.
"Currently CPI is within RBI's target range but at the April meeting, the central bank will have to tackle increasing inflation and rising bond yields," Gupta said.
India's economy is projected to contract 8% in the current financial year ending in March before growing at around 11% next financial year.
Retail food prices, which comprise nearly half of India's inflation basket, increased 3.87% in February on year compared to 1.96% in January.
Core inflation, excluding food and fuel costs, was estimated in the range of 5.61%-5.9% for the month by four economists, compared to 5.5%-5.7% in January.
India does not give official core inflation data.