March inflation down to 15-month low of 5.66%, in RBI’s comfort zone

Prices of vegetables, meat, fish, and edible oil have eased, bringing retail inflation down to a 15-month low of 5.66% in March, which is within the RBI’s comfort level of 6%, showed government data released on Wednesday (April 12).

Retail inflation based on Consumer Price Index (CPI) was 6.44% in February 2023 and 6.95% in the year-ago period. The previous low was also 5.66% in December 2021.

The government has mandated the Reserve Bank of India (RBI) to ensure that inflation remains within the 4–6% bracket. CPI was above 6% in January and February.

Watch: Explained | RBI’s repo rate remains unchanged at 6.5%; what does this mean for you?

According to the National Statistical Office (NSO), the year-on-year inflation declined in the vegetable basket by 8.51%, oil and fats by 7.86%, and meat and fish by 1.42% in March.

However, the rate of price rise in spices was high at 18.2% in March, followed by cereals and products by 15.27%. Fruits, too, were expensive.

The overall inflation in the food basket was 4.79% in March against 5.95% in February and 7.68% in the year-ago period. The food basket has a weightage of 54.18% in the overall CPI.

Positive outlook

Aditi Nayar, Chief Economist and Head Research and Outreach, 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% 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.

“With reasonably healthy reservoir levels, and the El Nino expected to materialise only in the second half of the monsoon season, kharif sowing may not be impacted. However, any subsequent deficiency in monsoon rainfall could affect yields and food inflation, which, along with any further hardening in crude oil prices, remains a risk for the inflation trajectory,” she stated.

Narinder Wadhwa, National President of Commodity Participants’ Association of India (CPAI), said the decline in inflation is a positive development for the Indian economy, as it suggests that inflationary pressures are easing, which can be beneficial for consumers and businesses alike.

Also read: Shaktikanta Das on RBI repo rate decision: “It’s just a pause, not a pivot’

Retail inflation remained above the RBI’s upper tolerance level of 6% since January 2022, except for November and December 2022.

“Lower inflation can lead to a decrease in the cost of living, making goods and services more affordable for consumers. Additionally, it can help to boost business and investment confidence, leading to increased economic activity,” Wadhwa said.

Assocham Secretary General Deepak Sood said it is a matter of relief that India’s inflation has started to drop on the back of a decline in the indices for several food items, including vegetables and edible oils.

RBI pause mode justified

The decline in the CPI-measured inflation in March justifies the pause mode of policy rates by the RBI earlier this month.

“Hopefully, 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,” he said.

The RBI, which mainly factors in CPI while arriving at its bi-monthly monetary policy, paused its rate hike spree in April, as global banking woes added uncertainty to the economic outlook.

The RBI has also lowered its inflation forecast to 5.2% for 2023-24 from 5.3%, with Governor Shaktikanta Das saying “war against inflation has to continue”.

Also read: RBI projects FY24 inflation at 5.2%, says fight against it is far from over

More clarity in June

Nayar further said by the time the MPC holds its next scheduled meeting in June 2023, the monsoon would be underway, giving a little more clarity to the likely outcome for the first half of the monsoon season.

“This information would influence whether the MPC’s CPI inflation projection of 5.2% for FY 2024 needs to be modified. We expect the June 2023 MPC decision to be highly data-dependent,” she added.

Ritika Chhabra, Quant Macro Strategist, Prabhudas Lilladher PMS, believes that broad-base softening of prices has contributed to a fall in inflation, which is good news.

“We are expecting inflation to fall below 5% in the first quarter FY24 due to base effect. However, since the number is more or less in line with the expectation, we are not expecting any material impact on yields,” Chhabra said.

NSO collects price data from selected 1,114 urban markets and 1,181 villages across the country. During March 2023, it collected prices from 100% of villages and 98.5% of urban markets.

(With agency inputs)