India’s retail inflation dropped to 5.66 per cent in March, as compared to 6.44 per cent in the month of February.
India’s retail inflation, as measured by the Consumer Price Index (CPI), eased further to 5.66 per cent in March on an annual basis. This decline was driven by falling vegetable prices, although surging cereal prices partially offset the moderation in food inflation. In comparison, inflation stood at 6.95 per cent in March 2022.
The consumer food price index (CFPI) also moderated to 4.79 per cent in March 2023, down from 5.95 per cent in February 2023 and 7.68 per cent in March 2022.
Rural inflation stood at 5.51 per cent, while urban inflation stood at 5.89 per cent.
However, despite the marginal decline, retail inflation in India remained above the Reserve Bank of India’s (RBI) upper tolerance band of 6 per cent for the second consecutive month in February 2023, with the CPI pegged at 6.44 per cent. In January, retail inflation was at 6.52 per cent.
Notably, March 2023 is the first month this year where India has seen a retail inflation reading below the RBI’s upper tolerance limit of 6 per cent.
According to a Reuters poll of 39 economists, inflation was forecast to have fallen to 5.80 per cent in March from 6.44 per cent in February. However, inflation is expected to average 5.2 per cent in the current fiscal year, which is above the medium-term target of 4.0 per cent, according to a separate Reuters poll.
In an effort to curb inflation, the RBI has raised the benchmark repurchase rate by a total of 250 basis points since May 2022. In the last fiscal year, which ended on March 31, the RBI projected average annual retail inflation at 6.5 per cent.
In a surprising move, the RBI’s Monetary Policy Committee (MPC) recently decided to keep the repo rate unchanged at 6.50 per cent. RBI Governor Shaktikanta Das clarified during a press conference after the policy announcement that this decision was a “pause and not a pivot” as the MPC wanted to assess the impact of the cumulative rate hikes since May 2022.
Deputy Governor Michael Patra reiterated that the pause is only valid until June 8, 2023, when the Governor will announce the next policy.
During this meeting, the RBI marginally reduced its retail inflation projection to 5.2 per cent for the current fiscal year. However, the central bank also flagged adverse climatic conditions and rising uncertainty in international financial markets as potential risks in the future.
Aditi Nayar, the chief economist & head of research at Icra Ratings, noted that financial stability concerns may have influenced the MPC’s decision, as they assess the impact of the cumulative rate hikes. However, if inflation does not fall in line with the MPC’s assessment for Q1FY24, another rate hike could be possible, especially if the financial stability situation stabilizes.