Business

Inflation Plunges Below Tolerance Band Of 6%

Retail inflation as measured by the Consumer Price Index (CPI) decreased to 5.66%, the lowest in 15 months, as a result of lower prices for food and fuel. However,  policymakers should be concerned about the cereal and milk prices’ ongoing upward trend.

After two months, headline inflation has reached its lowest level since November 2021 and is now again inside the Reserve Bank of India’s tolerance range of 2-6%. A noteworthy development is that sticky core inflation, which tracks the non-food, non-fuel portion of the CPI basket, has dropped below the 6% level after seven months.

The data was released after the RBI’s monetary policy committee kept the policy rate earlier this month after raising it by 2.5 percentage points since last May.

While the government and the RBI will be much relieved by these figures—retail inflation in 2022–23 is at 6.65%, its highest level since 2013–14—the decrease in inflation is partially the product of a positive base effect. The first month following the start of the war in Europe, March 2022, caused an inflationary shock to the world economy. The strong base last year will decrease inflation rates starting in March 2023. To put things in perspective, starting in March 2022, retail inflation was 7% or greater for four straight months. However, between February and March 2023, inflation rose by 0.2% on a sequential basis. Even while this is the same as February, a slightly longer-term perspective reveals that sequential inflation has also moderated.

Future inflation figures should decline further if the Monetary Policy Committee (MPC) of the RBI is to be believed. The MPC predicted 5.1% inflation for the June quarter and 5.2% for the fiscal year 2023–2024. Although many experts believe that monetary policy is now being dictated more by financial stability than pricing concerns, the most recent inflation figures will also offer some post-facto justification for MPC’s decision to not boost interest rates for the seventh consecutive time in its April meeting. In spite of the pause-not-pivot qualification of the April decision, the RBI is likely to hold interest rates unchanged in its June meeting, barring an increase in inflation.

Also Read: India Likely To Have Stable Debt-To-GDP Ratio

Malika Sahni

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