After staying above the RBI’s upper tolerance limit of 6 per cent for two consecutive months, the decline in retail inflation in March 2023 is a positive development for the country’s growth as it gives the RBI more relaxation space around interest rates. The CPI inflation in March fell to a 15-month low of 5.66 per cent, as prices of vegetables and protein-rich items eased.
The Reserve Bank has been mandated by the government to ensure inflation remains within the 4-6 per cent bracket. The CPI was above 6 per cent in January and February. The retail inflation, based on the Consumer Price Index (CPI), was 6.44 per cent in February 2023 and 6.95 per cent in the year-ago period. The previous low was also 5.66 in December 2021.
The year-on-year inflation declined in the vegetable basket by 8.51 per cent, oil and fats by 7.86 per cent and meat and fish by 1.42 per cent in March. However, the rate of price rise in spices was high at 18.2 per cent in March, followed by ‘cereals and products’ by 15.27 per cent. Fruits too were expensive.
What Does It Mean for the RBI?
Aditi Nayar, chief economist and head (research and outreach) at Icra, said unless the feared heatwave leads to a rapid rise in prices of perishables, inflation may report a substantial base-effect led drop to around 5-5.2 per cent in the next two prints, which will reinforce the decision of the RBI’s Monetary Policy Committee (MPC) to pause key interest rate in April 2023.
Sunil Sinha, principal economist at India Ratings and Research, said, “Inflation in the near term is likely to be lower than 6 per cent mainly due to base effect. Ind-Ra expects headline retail to come in at 5 per cent and core: 5.2 per cent in April 2023. This will give some solace to monetary authorities in their fight against inflation.”
He said Ind-Ra therefore believes that the growth-inflation dynamics at the current juncture does not warrant further rate hikes in near-term. However, RBI will continue to monitor inflationary trend and should a situation arise may take necessary action.
Suman Chowdhury, chief analytical officer of Acuité Ratings & Research, said, “If there are no surprises on the weather and the oil front, one can expect the headline inflation to moderate further and settle in the band of 5-5.5 per cent over the next few months. Such a trend is likely to support the continuation of the pause although a pivot on rates is still some distance away.”
Assocham Secretary General Deepak Sood said that as the rabi procurement of wheat and other cereals picks up, prices should further ease their pace, reversing the interest rate trajectory which had kept an upward pace since May last year.
In the surprising move last week, the RBI kept the repo rate unchanged at 6.5 per cent, against the market expectations of a 25 basis point hike. Since May 2022, the RBI MPC has hiked the repo rate by 250 basis points in six consecutive hikes.
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