India’s retail inflation drops to 6.44% in February: But remains above RBI’s threshold of 6%

By: Yash Gupte

The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for February 2023.

India’s retail inflation, which is measured by the Consumer Price Index (CPI), eased to 6.44 percent in February 2023, from 6.52 percent in January 2022. The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for February 2023. On the other hand, the consumer food price inflation marginally increased to 5.95 percent from 5.94 percent in January 2023. The consumer food price inflation had hit the mark of 7.01 percent in October 2022. 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 marginal 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 limited 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 before falling in February 2023 had increased in January 2023 to 6.52 percent. November has been the first month in the calendar year 2022 which had witnessed the CPI falling below the 6 percent mark. In the CY 2022, the CPI remained above RBI’s threshold of 6 percent except for the months of November and December when the CPI dropped to its lowest of 5.88 percent in November and 5.72 percent in December 2022.

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 has increased the benchmark interest rate by 250 basis points so far this fiscal year 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.

For the fourth consecutive month, core inflation—the non-food and non-fuel component remained above the 6 percent threshold, raising anticipation that the RBI will raise interest rates by another 25 basis points in its upcoming policy review in April. Also, even as rural inflation dropped to 6.72 percent in February from 6.85 percent in January, it continued to remain above urban inflation, which rose to 6.10 percent in February from 6 percent, a month ago.

Among the subcategories, cereal inflation surged to 16.73 percent in February, the sixth consecutive month of double-digit inflation, while vegetables continued to experience deflation for the fourth consecutive month at (-)11.61 percent. Milk and product inflation surged to 9.65 percent in February from 8.79 percent a month earlier, while fruit inflation increased to 6.38 percent from 2.93 percent. The inflation rate for meat and fish decreased to 3.39 percent in February 2023 from a month earlier when it was 6.04 percent.  The inflation rate for clothing and footwear decreased to 8.79 percent in February from 9.08 percent a month earlier, while the rate for fuel and light decreased to 9.9 percent from 10.84 percent.

The inflation rate crossed the RBI’s threshold of 6 percent in January (6.01 percent), which quickly jumped to 6.95 percent in March and hit the peak at 7.79 percent in April. 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.

Experts are of the opinion that if the inflation continues to rise in the following months, the central bank could further increase the repo rate thus resulting in liquidity tightening and directly affecting the consumers.

According to Sakshi Gupta, Principal Economist at HDFC Bank, Gurugram, "Inflation came in higher than expected, led by higher food inflation — particularly cereals and milk inflation. The risk to inflation is tilted towards the upside with El-Nino conditions predicted in 2023. The still sticky core provides little leg room for absorbing any spikes in food inflation that might develop in the coming months.”