Inflation rate slumps to a year low at 5.72% in December 2022: CPI remains below RBI’s threshold of 6%

By: Yash Gupte

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was increased in December by the Monetary Policy Committee (MPC) by 35 basis points (bps), bringing it to 6.25 percent.

India’s retail inflation, which is measured by the Consumer Price Index (CPI), eased to 12 month low of 5.72 percent in December 2022, down from 5.88 percent in November 2022. The National Statistical Office (NSO) released the All India Consumer Price Index (CPI) and corresponding Consumer Food Price Index (CFPI) for December 2022. The consumer food price inflation has also dropped down at 4.19 percent from 4.67 Percent in November 2022 and 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 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. November has been the first month in the calendar year 2022 which has 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 increased in December by the Monetary Policy Committee (MPC) by 35 basis points (bps), bringing it to 6.25 percent. The MPC has increased the benchmark interest rate by 225 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.

The chart below shows the CPI from January to December 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 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 has contributed in the decline in retail inflation in the month of November and December.

The rural inflation was higher at 6.05 percent as compared to 5.39 percent in urban areas. In December 2021, the inflation was higher in urban areas.

Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank told Reuters that “December CPI headline came in softer than expectations, largely led by lower food prices. However, core inflation continues to remain elevated and sticky.”

RBI governor Shaktikanta Das indicated that the central bank was likely to stay hawkish in the near term when he stated that the RBI would continue its fight against inflation despite the worst being "behind us" during its December monetary policy meeting.

Many economists and market experts have anticipated that MPC will hike the repo rate by another 25-30 basis points in February 2023 with an aim of keeping the inflation below the mark of 6 percent.