Thursday, 10 Oct, 2024
India’s retail inflation shot up to a 4 month high of 5.69 percent in the month of December. The retail inflation which is measured by the Consumer Price Index (CPI) stood at 5.55 percent in November. Image Source: IANS
Following its meeting in December, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously agreed to maintain the repo rate at 6.5 percent
According to the data released by the Ministry of Statistics and Programme Implementation, India’s retail inflation shot up to a 4 month high of 5.69 percent in the month of December. The retail inflation which is measured by the Consumer Price Index (CPI) stood at 5.55 percent in November. The urban inflation in December 2023 increased to 5.46 percent from 5.26 percent in November. Talking about the inflation in rural areas, it jumped from 5.85 percent in November to 5.93 percent in December. 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.
Coming over to the inflation in food prices, it increased from 8.70 percent in November to 9.53 percent in December. An increase was also registered in the case of food inflation in urban as well as rural areas. In urban areas, it increased from 9.33 percent to 10.42 percent in December while in the case of rural India, the food inflation jumped from 8.38 percent to 8.97 percent.
Although the Reserve Bank of India's (RBI) medium-term target of 4 percent has been exceeded for 51 consecutive months, headline retail inflation increased in December. However, for the second consecutive month, it fell short of expectations, guaranteeing that it has not exceeded the RBI's forecast of 5.6 percent for the October–December period.
The recent inflation data, which is the final one before Finance Minister Nirmala Sitharaman presents the interim budget for 2024–25 on February 1 and the Monetary Policy Committee's interest rate decision on February 8, will be welcome news to policymakers given the lower-than-expected increase in retail prices in December.
Following its meeting in December, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously agreed to maintain the repo rate at 6.5 percent. The MPC maintained the policy stance of 'withdrawal of accommodation' by the majority of 5 out of 6 members. The MPC has opted to keep the repo rate at its current level at its fifth meeting. In February 2023, the MPC last increased this rate by 25 basis points, to 6.50 percent. 5 out 6 MPC members voted in favour of withdrawal of accommodation.
In an attempt to slow down the rising inflation, which fell to a four-month low of 4.87 percent in October, the RBI has increased the repo rate by a total of 250 basis points (bps) since May 2022. However, it is anticipated that the rate would stay over the 4 percent medium-term objective for some time.
Source: Ministry of Statistics and Programme Implementation
RBI Governor Shaktikanta Das said, “The moderation in retail inflation in October to 4.87 percent from June’s high of 7.4 percent, has been broad based. The near-term outlook however is marked by food inflation pressures which may show up in November as well as December. Against this backdrop, the MPC remains highly alert and prepared to take appropriate actions as necessary.”
RBI Governor Shaktikanta Das had rightly marked that the inflation could go up in December especially in the case of food items.
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 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.
According to Madhavi Arora of Emkay Global, the inflation downtrend will be more visible in the fourth quarter, averaging 5.1 percent, while core could be sub 3.75 percent. "We see FY25E headline inflation at near 5.2 percent, while core would average much lower near 4 percent. That said, we don’t see any action by the RBI, and it is unlikely to precede the Fed in any policy reversal," said Arora.
In the food basket, prices for fruits (11.14 percent), vegetables (27.6 percent), pulses (20.73 percent), and sugar (7.14 percent) increased. In contrast, prices for cereals and spices, which continued to show strong increases in inflation in December (of 9.9 percent and 19.7 percent, respectively), decreased only little. The prices of milk (5.1 percent), meat and fish (1.15 percent), and eggs (4.4 percent) all saw further decreases in inflation.
