India’s retail inflation eases to 25 month low in May 2023, drops to 4.25%

By: Yash Gupte

The urban inflation also dropped to 2.43 percent in the month of May from 3.69 percent in April. A similar trend was witnessed in the rural inflation as it dropped from 3.89 percent in April to 3.19 percent in May 2023.

India’s retail inflation, which is measured by the Consumer Price Index (CPI), eased to 25 month low of 4.25 percent in May 2023, down from 4.70 percent in April 2023. The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for May 2023. The consumer food price inflation has also dropped down to 2.91 percent in May from 3.84 percent in April 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 2.43 percent in the month of May from 3.69 percent in April. A similar trend was witnessed in the rural inflation as it dropped from 3.89 percent in April to 3.19 percent in May 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.

The Reserve Bank of India has put a hold to its repo rate hike spree. In its second bimonthly monetary policy meeting of FY24, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) made the decision to maintain the repo rate at 6.5 percent. By a vote of 5 to 1, the MPC decided to keep concentrating on the removal of accommodations. The consumer price inflation dropped between March and April 2023 and went into the tolerance band, decreasing from 6.7 percent in 2022–2023, according to RBI Governor Shaktikanta Das, who also announced the policy.

Source: Ministry of Statistics and Programme Implementation

In May, the retail inflation rate for veggies decreased by 8.18 percent, and the inflation rate for oils and fats decreased by 16 percent. Cereal product inflation was 12.65 percent, milk product inflation was 8.91 percent, and spice product inflation was 17.9 percent.

In May, the inflation rate for cereals and beverages was 3.29 percent, for fuel and lighting it was 4.64 percent, and for housing it was 4.84 percent. The moderate levels of food and gasoline prices helped to lower the month's overall inflation reading. Additionally, core inflation, or inflation that excludes the erratic food and fuel prices, dropped from 5.2 percent in April to 5 percent in May.

When announcing the second monetary policy committee (MPC) stance for the fiscal on June 8, the RBI forecast CPI inflation for the current fiscal (FY24) at 5.1 percent. The rate-setting panel chaired by RBI Governor Shaktikanta Das expects inflation to be 4.6 percent in the first quarter of fiscal 2023–2034 (Q1FY24).

Sakshi Gupta, Principal Economist at HDFC Bank said, “Inflation softened further in May as a high base effect continued to pull down the inflation prints. Food inflation continued to moderate and it was encouraging to see a seasonally adjusted sequential decline in the headline inflation as well in the month. Going forward, inflation is expected to print below 5 percent again in June although moving higher from Q2 onwards.” "The impact of any El Nino disturbances, the higher MSP price increases and the late arrival of monsoons remain upside risks for the inflation trajectory going forward. The RBI is expected to remain on hold in 2023 with rate cuts starting not before 2024. Timing of rate cuts is likely to be determined by how impending weather related inflationary risks pan out. For the year, for now we retain our forecast of 4.9 percent average inflation in FY24, with upside risks to this estimate," she added.

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. 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 and it further dropped to 4.25 percent in May, lowest in 25 months.

Though the retail inflation has dropped to a 25 month low, industry experts have warned that the coming months may witness an increase in inflation. Rahul Bajoria, MD and Head of EM Asia at Barclay’s warned that prices may rise again starting July 2023 if the El Nino effects play out, which will impact production. Also, stickiness in core inflation may lead to prices inching higher.