Inflation rate jumps to a 3 month high at 6.52% in January 2023: CPI breaches RBI’s threshold of 6%

By: Yash Gupte

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.

India’s retail inflation, which is measured by the Consumer Price Index (CPI), jumped to 3 month high of 6.52 percent in January 2023, from 5.72 percent in December 2022. The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for January 2023. The consumer food price inflation has also increased to 5.94 percent from 4.19 percent in December 2022. 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 rise 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 rising in January 207.41%23 had come down in December 2022 to its lowest level since December 2021. November has been the first month in the calendar year 2022 which had witnessed the CPI falling below the 6 percent mark

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.

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 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.

The rural inflation was higher at 6.85 percent as compared to 6.00 percent in urban areas. In January 2022, the inflation was higher in urban areas. Looking closely, the inflation rate for cereals and other products increased by 16.12 percent on a combined basis, while it was between 6 percent and 9 percent for eggs, milk, meat, and fish. However, the inflation fell by 11.7 percent for veggies while rising by 21.09 percent for spices. Retail inflation jumped by 6.19 percent for food and beverages while it increased by 9.08 percent for apparel and footwear. Fuel and light inflation increased by 10.84 percent while housing inflation increased by 4.62 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.

Aditi Nayar, Chief Economist, and Head - Research & Outreach, ICRA Ltd, said that, “The CPI inflation recorded a sharper-than expected spike to a three month high 6.5 percent in January 2023, led by an unexpectedly acute jump in the food inflation. Following the surge in the Jan 2023 CPI inflation print, we have revised our forecast for the Q4 FY2023 average CPI inflation to 6.2 percent from 6.0 percent, which exceeds the projection released last week by the MPC, suggesting that another rate hike may be in the offing in April 2023.