According to The Times of India article published on December 12, 2022, Retail inflation based on consumer price index (CPI) eased to 11-month low of 5.88% in November, data released by the government showed on Monday.
This is the first time since the beginning of this year that inflation numbers have remained within Reserve Bank of India India's (RBI) tolerance band of 2-6%. The RBI has been tasked by the government to keep inflation within 2-4% range, with a margin of 2% on each side.
In December last year, retail inflation figures were at 5.59%. Since then, CPI numbers were on an upward trajectory and surged to 8-year high of 7.79% in April.
We can now say that retail inflation numbers are back to a level where it was 2 months before Russia invaded Ukraine in February, which sent global food and commodity prices soaring.
This is the 2nd consecutive month when India witnessed a cool down in inflation figures. In October too, annual retail inflation had eased to a three-month low of 6.77%. This was mainly on account of a slower rise in food prices and a higher base effect, strengthening bets on smaller rate increases by the central bank going ahead.
he data comes days after the RBI slowed the pace of interest rate hikes while vowing to keep a close eye on inflation and act as necessary.
What led to ease in prices
The ease in retail inflation can be largely attributed to cooling food prices, which account for nearly 40% of the CPI basket.
Food inflation came down significantly from 7.01% in October to 4.67% in November. Vegetable rates also contracted by 8.08%.
Meanwhile, price of cereals and spices continued to surge as it stood at 12.96% and 19.52% respectively.
Inflation rate in fuel and light also surged to 10.62% as against 9.93% in September.
"A sharp fall in vegetable prices have largely been the driver of this downside surprise, with a number of other food items continuing to show rise in prices," Aurodeep Nandi, India economist and vice-president at Nomura told Reuters.
"In our estimate, core inflation remained largely sticky at around 6%, suggesting that underlying inflationary pressures are yet to abate," he added.
What this means
Soaring retail inflation was a major cause of concern for the RBI as well as the government as the spillovers from global challenges had the potential to derail economy from its growth path.
The average inflation was above the upper tolerance level of the inflation target, that is 6 per cent for 3 consecutive quarters during January-September, 2022.
This required the central bank to submit a report to the government as to why it failed to keep inflation below the the tolerance band of 6% for 3 straight quarters.
It is highly expected that RBI will now slowdown the pace of hike in interest rates. In line with central banks of major economies, the RBI has also started to hike key lending rates from May, in order to ease the surging inflation.
"Going ahead, easing supply side impulses, commodity price correction, especially Brent crude and seasonal softening in food prices led by vegetables are likely to be key tailwind for inflation trajectory," Garima Kapoor, economist, institutional equities at Elara Capital told Reuters.
Bank of Baroda chief economist Madan Sabnavis told PTI that although there is easing in food prices, the core component continues to be irksome, with clothing and footwear, fuel and light and the miscellaneous categories witnessing high inflation of above 6% each.
Within the miscellaneous group, inflation has been high in household goods, health, recreation, education and personal care. "Companies have been passing on higher input costs to the customers which has resulted in this category being sticky," he noted.
Sabnavis said since the advantage of the base effect will not be available in December, inflation can be above 6.5%.
'Worst of inflation over'
Presenting his bi-monthly monetary policy statement last week, RBI governor Shaktikanta Das had said that worst of this year's inflationary spike "is behind us" but warned there was no room for complacency.
"The MPC was of the view that further calibrated monetary policy action was warranted to keep inflation expectations anchored, break core inflation persistence and contain second round effects," Das had said.
RBI deputy governor in-charge of monetary policy Michael Patra also supported Das's views and said that the worst of inflation is over but moderation of will be very grudging.
"The worst of inflation is over but the moderation of inflation will be very grudging, very uneven. So we must shepherd inflation first firmly into the tolerance band and then to the target," Patra said.
He also underlined the importance of the smaller rate hike than at previous meetings, but said the central bank was closely watching for second round effects of inflation.
Slower pace of rate hikes
RBI hiked the key repo rate by 35 basis points, the fifth straight increase since May, raising prospects of EMIs for home, auto and other loans rising further.
However, this time the pace of hike was slower than earlier. the previous four increases totaled 190 bps, with the last three hikes being 50 bps each. In all, RBI has raised rates by 225 bps, taking repo rate to 6.25%.
The central bank, whose primary mandate is to ensure price stability, last month wrote a letter to the government, explaining how global factors contributed to its failure to keep inflation below the target zone for three straight quarters. On the same note, it outlined a roadmap to bring price gains within target.
The RBI retained its 6.7% inflation forecast for the current fiscal year ending March but lowered economic growth expectation to 6.8% from the 7% forecast previously.
