India’s retail inflation above RBI’s target level for second month

Retail inflation in India remained above the Reserve Bank of India’s 6 percent upper tolerance band for the second consecutive month in February 2023, with the Consumer Price Index standing at 6.44 percent, according to government data released on Monday. In rural and urban India, retail inflation was 6.72 percent and 6.1 percent, respectively.

Cereals and products, as well as fruits, contributed to the increase in retail inflation in February. Furthermore, the Consumer Food Price Index in February was 5.95 percent, according to data. Vegetable retail inflation, on the other hand, fell 11.61 percent.

Notably, retail inflation in India in December was 5.72 percent, compared to 5.88 percent in November and 6.77 percent in October, according to the Consumer Price Index. Retail inflation in India has been above the RBI’s 6% target for three consecutive quarters, and it will only return to that level in November 2022.

The RBI is deemed to have failed in managing price rises under the flexible inflation targeting framework if CPI-based inflation falls outside the 2-6 percent range for three quarters in a row.

To combat inflation, the RBI has raised the short-term lending rate by 250 basis points since May of last year, including the most recent 25 basis point increase. Raising the repo rate helps to cool the economy’s demand and thus manage inflation.

Raising interest rates is a monetary policy tool that typically helps to suppress demand in the economy, allowing the inflation rate to fall.
Meanwhile, average retail inflation in India is expected to be 5.3 percent in the fiscal year 2023-24, according to Reserve Bank of India Governor Shaktikanta Das, who announced monetary policy outcomes last month.

He had stated that the projection was based on the assumption of a normal monsoon. Inflation is expected to average 5.0 percent in Q1 2023-24, 5.4 percent in Q2, 5.4 percent in Q3, and 5.6 percent in Q4.

Inflation is expected to be 6.5 percent for the fiscal year 2022-23, which ends in March, with an average of 5.7 percent in the January-March 2023 quarter.