Monday, December 4, 2023

India’s retail inflation increases above tolerance for 3rd quarter

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Retail inflation in India increased to 7.41% in September and has now exceeded the Reserve Bank of India’s target range of 2–6% for nine consecutive months.

The retail inflation rate in August was 7%. In rural India, the price increase has been more abrupt. According to data from the National Statistics Office, consumer price index-based inflation (CPI) rose to 7.56% in rural India in September while remaining at 7.27% in urban India.

For three consecutive quarters, the headline inflation rate has exceeded the RBI’s statutory tolerance range of 2–6%. 

If the CPI-based inflation goes outside the 2–6% range for three consecutive quarters, the flexible inflation targeting framework considers the RBI to have failed in managing price rise.

The following are some opinions expressed by analysts and specialists on the most recent inflation data: Aditi Nayar, ICRA’s Chief Economist

In September 2022, the CPI inflation spiked to a higher-than-anticipated five-month high of 7.4%, with food inflation being the main driver of the sequential increase and the upside compared to our expectation of 7.2%.

The early October 2022 extra rain may have a negative effect on the Kharif harvest and postpone the rabi planting, which would considerably increase the danger of food inflation. The high base that will be present for H2 FY2023, however, is anticipated to at least somewhat mitigate the impact of the same on the year-over-year food inflation readings.

After the unsettling inflation data in September, another rate increase seems unavoidable in the December 2022 MPC session. How much the inflation print declines in October 2022 and the strength of the GDP growth for Q2 FY2023 will decide the magnitude of the upcoming rate rise.

In September, the CPI increased by 7.41% year over year (y-o-y), which was slightly more than the consensus prediction of 7.3%. High food costs, particularly those of grain, were the main cause of this CPI increase.

Rice and wheat were the major drivers of the 11.53 percent y-o-y increase in cereal prices. Food costs are being affected by irregular rains, a decrease in the area planted to rice and beans, and these factors. However, a sequential reversal in food prices may cause a little decrease in prices in October.

Because of rising food costs, consumer inflation in the economy is still stubborn at 7.41%. As a result of import inflation brought on by the significant devaluation of the rupee, inflation is expected to rise in the future. Crude oil import price pressure will have a domino effect on the basket’s other commodities as well.

Additionally, elements like the transfer of input costs and an uptick in consumer demand backed by the revival of the services sector would increase the likelihood of inflation in the upcoming months. A monetary policy rate action that is out of line with current inflation levels, which frequently exceed the RBI’s target level of 4% CPI, is still a possibility.

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