Inflation rate in October falls to three-month low, yet remains above RBI’s threshold of 6%: India Tracker explainer

By: Yash Gupte

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The central bank's Monetary Policy Committee (MPC) hiked the repo rate to 5.90 percent in September 2022 in order to tackle the rising inflation.

The National Statistical Office (NSO) has released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for October 2022. The consumer inflation in October stands at 6.77 percent down from 7.41 percent in September. The consumer food price inflation has also dropped down at 7.01 percent from 8.60 percent in September 2022. The inflation rate which is measured by the Consumer Price Index (CPI), eased to a three-month low of 6.77 per cent in the month of October. 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.

Government measures to control inflation

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. However, the central bank couldn’t keep this in check as the Consumer price index continued to remain above the 6 percent mark for the tenth consecutive month.

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The central bank's Monetary Policy Committee (MPC) hiked the repo rate to 5.90 percent in September 2022 in order to tackle the rising inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. The repo rate has been increased by 190 basis points to 5.90 percent since the RBI began its rate-tightening cycle in May 2022. However, it has not been able to reduce inflation to below 6 percent (inflation target). 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 chart below shows the CPI from January to October 2022.

Source: Ministry of Statistics and Programme implementation

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 has remained above 6 percent for the tenth consecutive month. Factors like rise in food prices, domestic fuel price level and pressure on the Indian currency contribute to the rise in inflation.

A similar trend was also observed in food price inflation basket. The Consumer Food Price Index (CFPI) was the lowest in January by 5.43 percent. It increased by a record 3 percent to hit the highest in April 2022 at 8.8 percent. Similar to CPI, CFPI also declined from April till July. The CFPI broke the earlier record and reached highest ever in September at 8.60 percent.

The food price inflation dropped from 8.60 percent in September to 7.01 percent in October. Though there is a drop in inflation, the prices of several commodities continue to rise. Apart from the food products, the highest year-on-year inflation rate was recorded in the category of clothing & footwear (10.16 percent) and fuel & light (9.93 percent).