India’s inflation rate slumps to 15 month low at 5.66%: CPI remains below RBI’s threshold of 6%

By: Yash Gupte

The urban inflation also dropped to 5.89 percent in March from 6.10 percent in the previous month. A similar trend was witnessed in the rural inflation as it dropped from 6.72 percent in February to 5.51 percent in March 2023.

India’s retail inflation, which is measured by the Consumer Price Index (CPI), eased to 15 month low of 5.72 percent in December 2022, down from 5.66 percent in March 2023. The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for March 2023. The consumer food price inflation has also dropped down at 4.79 percent from 5.95 Percent in February 2023 and 7.68 percent in January 2023. Consumer price index is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. This means that higher the CPI, higher the inflation which occurs due to the rise in prices of goods and services. The urban inflation also dropped to 5.89 percent in March from 6.10 percent in the previous month. A similar trend was witnessed in the rural inflation as it dropped from 6.72 percent in February to 5.51 percent in March 2023.

The fall in retail inflation indicates that the steps taken by Reserve Bank of India (RBI) to control the rising inflation in the country have delivered success. The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The retail inflation has come down to its lowest level since December 2021. March has been the first month in the calendar year 2023 which has witnessed the CPI falling below the 6 percent mark. According to experts, the inflation is expected to remain below 6 percent in the coming months helped by a high base, which may allow RBI to maintain pause in the next monetary policy review in June.

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was recently increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

Source: the Ministry of Statistics and Programme Implementation

However, though the RBI was expected to increase the repo rate by 25 basis points to 6.75 percent, highest till date, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Thursday, April 6, 2023 decided not to hike the repo rate and kept is steady at 6.5 percent. Some experts expressed caution, however, stating that RBI's upcoming policy decision would also be data-dependent and based on the course of the monsoon and crude oil prices, both of which continue to be risk factors for inflation.

As per the data released by the Ministry of Statistics and Programme Implementation (MoSPI), the prices of vegetables and oils declined nearly 8 percent year-on-year while the prices of spices increased by 18.21 percent followed by cereals (15.27 percent) and milk (9.31 percent). Due to increased feed costs and a shortage of dairy cattle as a result of the deadly lumpy skin disease outbreak, milk prices have been on the rise for months and are rising at a rapid pace. 

The retail inflation hit the peak at 7.79 percent in April 2022. This indicates that the prices of goods and services increased drastically in March and April. The primary reason behind the drastic increase was the disruption in supply chains caused by the Russia-Ukraine conflict. There was a drop in CPI in May, June and July as the government banned the export of wheat and sugar in order to increase its availability in the local market and cool down its prices.

However, the trend reversed in August when inflation rate again jumped to 7.00 percent, further escalating to 7.41 percent in September. The CPI had remained above 6 percent for the tenth consecutive month in October. Factors like rise in food prices, domestic fuel price level and pressure on the Indian currency contribute to the rise in inflation. The retail inflation measured by the CPI came down below the mark of 6 percent in November for the first time in 2022. The fall in food prices and the implementation of the RBI’s tight monetary policy under which it has been increasing the repo rate had contributed in the decline in retail inflation in the month of November and December. But the trend was again reversed in the month of January 2023 as the retail inflation breached the mark of 6 percent and jumped to 6.52 percent. But in the month of March, the inflation declined to 5.66 percent, the lowest in 15 months.

Aditi Nayar, the chief economist & head of research at ICRA Ratings, said “Unless the feared heat wave leads to a rapid rise in prices of perishables, inflation may report a substantial base-effect led drop to around 5.0-5.2 percent in the next two prints, which will reinforce the MPC’s decision to pause in April 2023. With reasonably healthy reservoir levels, and the El Nino expected to materialise only in the second half of the monsoon season, kharif sowing may not be impacted. However, any subsequent deficiency in monsoon rainfall could affect yields and food inflation, which along with any further hardening in crude oil prices remains a risk for the inflation trajectory.”