Inflation under 6%, but here’s why RBI may not moderate hawkish stand yet

It means that the general price level rose by 5.88% in November this year compared to where it was in November last year (2021). Retail inflation is measured by using the Consumer Price Index (CPI); that is why it is often called CPI-based inflation. Essentially it maps the price level that a retail consumer faces as against wholesale inflation, which is measured using the Wholesale Price Index (WPI).

Why is this significant?

November is the first month since the start of the 2022 calendar year when the retail inflation rate has fallen below the 6% mark. The 6% mark is crucial because it is the highest level of the RBI’s comfort zone. By law, the RBI, India’s central bank, is required to maintain inflation at a 4% level. However, the law provides a leeway of two percentage points on either side of 4% in any particular month. This means retail inflation can be between 2% and 6%.

However, retail inflation has been above 6% through 2022. This has resulted in RBI having to explain to the government and Parliament why it failed to contain retail inflation.

What contributed to the sharp deceleration in inflation rate?

The data suggest food inflation has decelerated quite sharply in November. For instance, consumer food price inflation was growing at 8.6% in September. Since then it has decelerated to 7% in October and to just 4.67% in November.

What was the geographical distribution of inflation in India?

Telangana (7.89%), Andhra Pradesh (6.9%), and Haryana (6.81%) were the states with the highest inflation rate, while Delhi (2.17%), Himachal Pradesh (3.22%), and Chhattisgarh (3.5%), had the lowest inflation rate. The national average was 5.88%.

Does this mean the days of high inflation are past?

Retail inflation hit an eight-year high of 7.8% in April. While it has moderated from that high, it has still remained uncomfortably high.

“We continue to see CPI inflation around 6% till February 2023 before dipping sharply to 5% in March and to around 4.5% in 1QFY24 (i.e. first quarter of 2023-24 financial year, or the April to June quarter of 2024),” Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said in a recent research note.

In other words, inflation is likely to stay high for a few more months.

Does this mean RBI can stop raising interest rates?

RBI has raised interest rates by 225 basis points since May in a bid to contain fast rising inflation. To some extent, higher interest rates are beginning to have effect by slowing down economic activity and curtailing overall demand. However, it is the softening in food inflation that has led to the moderation in headline inflation.

Under normal circumstances, a 5.88% headline inflation would have given an opportunity for the RBI to claim victory. But in the recently concluded monetary policy that was announced on December 7, the RBI appeared concerned about high core inflation, which is the inflation rate without the food and fuel prices.

High core inflation — it has stayed at and around the 6% mark almost right through the year — suggests that high prices have seeped through the broader economy. In other words, everything from clothes to houses is costlier now — not just food and fuel prices, which tend to fluctuate rapidly. In November, too, core inflation rose further.

The trouble with high core inflation is that it takes a long time to moderate. As a result, it is quite likely that RBI will continue to maintain its hawkish stance for some more time.