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Inflation over comfort range of 6%; no need for alarm: RBI

India CPI Inflation Rate January 2022: The retail inflation which is measured by the Consumer Price Index (CPI) for December 2021 was revised to 5.66 per cent from 5.59 per cent, government data revealed.

Written by Aanchal Magazine , Sunny Verma | New Delhi |
Updated: February 15, 2022 7:25:57 am
Customers at the grain market, on the day of presentation of the Union Budget 2022-23, in Navi Mumbai. (PTI Photo)

India CPI Inflation Rate January 2022:  Retail inflation rose to a seven-month high of 6.01 per cent in January, breaching the upper tolerance level of the medium-term inflation target of 4+/-2 per cent set by the Reserve Bank of India (RBI), data released by the National Statistical Office (NSO) on Monday showed. The rise was mainly on account of high food inflation, which jumped to a 14-month high of 5.43 per cent, along with an unfavourable base.

Inflation at the wholesale level in January softened to 12.96 per cent from 13.56 per cent a month ago but marked the tenth consecutive month of being in double digits, another set of data released by the Ministry of Commerce and Industry on Monday showed. Wholesale food inflation was, however, at a 24-month high of 9.6 per cent. Wholesale Price Index (WPI)-based inflation rate is reflective of the price pressures on the inputs side and of manufacturers passing on the higher input costs to their output prices.

Earlier in the day before the government released data on prices, RBI Governor Shaktikanta Das said there was no need to panic on the inflation front. “Today’s inflation print is expected to be around 6 per cent. So that should not surprise or create any alarm, because we have taken that into consideration,” he said after the RBI board’s customary post-Budget meeting with Finance Minister Nirmala Sitharaman.

Explained

Why the worry

AS RBI keeps its monetary stance easy to ensure a broad-based recovery, there are risks of retail inflation becoming more generalised. There are already signs of inflation turning structural in non-food segments like clothing, health and transport. High global inflation and rising crude oil prices will exert further pressure.

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There was a delicate balance between inflation and growth and the Reserve Bank was fully aware of its commitment to inflation, Das said. The momentum of inflation in India, he pointed out, has been moving down since October and that the “price stability” was of foremost importance to the central bank. “The rise in CPI inflation during October-December is mainly on account of the statistical effect of a low base,” he said.

Last week, the RBI had projected India’s average inflation to soften to 4.5 per cent in 2022-23, down from an estimated 5.3 per cent in 2021-22. The RBI’s inflation projections are “robust” but contingent on downside and upside risks associated with the movement of global crude oil prices, he said. “At this point of time, our inflation projections are quite robust, and we stand by it. If there is something of course totally unforeseen, which nobody can expect, (then) that is different…,” he said.

With respect to rising oil prices and their impact on inflation, he said the RBI considers a particular range within which crude prices are expected to fluctuate considering all the factors that can be anticipated and sort of foreseen as of today.

But economists said the high inflation was now turning structural, with price rise being seen in non-food segments such as clothing, fuel and light, household goods, health, transport, and communication above 6 per cent. “These prices are based on the MRP principle and will not come down once increased. Manufacturers are in the process of passing on the higher input cost to the consumer and this will carry on for the next two months too,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.

“Most states have witnessed higher than 6 per cent inflation with Haryana registering the highest inflation of 7.2 per cent. The critical element will be in March when the elections conclude as this is the time there can be a fresh round of increase in fuel prices,” he said.

The structural aspect of inflation is reflected in the core inflation remaining sticky (5.96 per cent in January). “Clothing & footwear inflation now stands at a 97-month high (8.84 per cent) on the back of higher cotton prices. Household goods and services inflation at 7.1 per cent is at a 94-month high in January 2022. Amid elevated input costs, various automobile, telecom and FMCG firms have announced price hikes. As a result, core inflation has remained sticky,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research said.

The previous high for retail inflation was seen at 6.26 per cent in June 2021. In January, an unfavourable base effect led to a sharp turnaround in vegetables from a disinflation of 3 per cent in December 2021 to a 14-month high inflation of 5.2 per cent.

Going ahead, the CPI inflation is expected to peak in the ongoing quarter and may not moderate as quickly as projected, especially if domestic demand rebounds after the abatement of the less severe third wave, economists said but ruled out an immediate change in stance by the RBI. “The tone of the February 2022 policy review virtually rules out a stance change in April 2022, notwithstanding the elevated CPI inflation print for January 2022, and the low likelihood of a meaningful reversal in February 2022… our new base case is a change in stance in June 2022, followed by two repo rate hikes of 25 bps each in August 2022 and October 2022, guided by our view that inflation will not moderate appreciably in H1 FY2023. A calibrated increase in the reverse repo hike could commence from Q1 FY2023, although we still expect it to be dovetailed to, rather than preceding, the stance change,” Aditi Nayar, Chief Economist, ICRA said.

In its monetary policy review on February 10, RBI kept the key policy rates unchanged and maintained an accommodative stance. It also took note of the cost-push pressures on core inflation – the non-food, non-fuel component of inflation. “Going forward, vegetable prices are expected to ease further on fresh winter crop arrivals. The softening in pulses and edible oil prices is likely to continue in response to strong supply-side interventions by the Government and increase in domestic production. Prospects of a good Rabi harvest add to the optimism on the food price front. Adverse base effect, however, is likely to prevent a substantial easing of food inflation in January,” it said.

The RBI has projected 5.3 per cent retail inflation for FY22, with Q4 inflation seen at 5.7 per cent before easing to 4.9 per cent in Q1 FY23. “The MPC notes that inflation is likely to moderate in H1:2022-23 and move closer to the target rate thereafter, providing room to remain accommodative. Timely and apposite supply side measures from the Government have substantially helped contain inflationary pressures. The potential pick up of input costs is a contingent risk, especially if international crude oil prices remain elevated,” it said.

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