Retail inflation cools to 18-month low 4.7%

India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI) fell to 4

India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI) fell to 4.7% in April 2023, the lowest it has been in 18 months, on the back of lower food prices and because of the base effect.

Within food, prices of vegetables, egg, fish and meat and edible oils have seen a contraction. (PTI)

The latest inflation numbers justify RBI’s Monetary Policy Committee’s (MPC) decision to keep policy rates unchanged in its April meeting. In fact, another high frequency indicator, namely, the Index of Industrial Production (IIP) for March 2023 shows that the monetary policy tightening over the last year has already started taking a toll on economic activity. At 1.1%, IIP growth in the month of March 2023 was the lowest since November 2022 despite a low base.

With real rates reaching 1.8% in April 2023, the highest level since September 2019, this raises a question whether the central bank will cut rates when the MPC meets in June. RBI’s current phase of monetary tightening has increased the policy rate by 2.5 percentage points in five rate hikes beginning May 2022. RBI governor Shaktikanta Das described the April decision to keep rates unchanged as a “pause, not a pivot”. The high rate was hurting borrowers and also affecting demand in the real estate market, with the high cost of mortgages acting as a dampener.

“So far, high interest rates have had a moderate impact on the housing market with the affordable segment particularly taking major portion of the blow. If inflation rate trajectory gives some comfort to continue the decision on pause in this interest rate hike cycle, it will be the biggest comfort factor for the real estate industry”, Vivek Rathi, Director Research, Knight Frank India a real estate consultancy firm said in a note.

At 4.7%, headline retail inflation in April 2023 is a percentage point lower than the March 2023 print of 5.7%. The latest inflation number is also in sync with the 4.76% forecast by a Bloomberg poll of economists. The April meeting of MPC projected 5.1% inflation for the quarter ending June 2023 and 5.2% for the fiscal year 2023-24. To be sure, part of the moderation seen in the April inflation numbers is driven by a favourable base effect, as retail inflation was at 7.8% in April 2022.

The fall in inflation between March and April is on account of broad-based moderation in inflationary pressures. Data from the Centre for Monitoring Indian Economy (CMIE) shows that food inflation, which accounts for 39% of the CPI basket, has fallen from 4.8% to 3.8%. Within food, prices of vegetables, egg, fish and meat and edible oils has seen a contraction while cereals, milk and spices continue to show high inflation. To be sure, inflation has seen some moderation for cereals and milk products as well. Core inflation – it excludes the food and fuel component of the CPI basket – has fallen from 5.95% in March 2023 to 5.36% in April according to CMIE data.

“This is the first sub-5% (inflation) print since November 2021, and while partly driven by a high base, sequentially, inflation also appears to be losing steam”, Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said in a note. “The moderation in inflation, which is expected to continue in the near term, suggests that the RBI’s hiking cycle is over”, the note added while flagging “the risks of a potential El Niño in H2 23 (September 2023 to March 2024) as a risk factor in the medium term to food prices, which may raise concerns about food production and prices”.

While the latest inflation numbers are good news for the economy and policy makers, a sharp fall in industrial growth as captured by IIP should be a matter of concern. Headline IIP growth in March 2023 fell sharply from its February value of 5.8% to just 1.1%. Manufacturing suffered an even bigger loss in momentum, with the respective numbers being 5.6% and 0.5%. A use-based analysis of the IIP numbers shows that a 5.3% contraction in production of consumer goods – it has a weight of 28% in the index – was the biggest reason for the sharp fall in headline IIP growth. Given the fact that the March 2023 IIP numbers have come on an already low base -- March 2022 IIP growth was just 2.2% -- they do raise concerns about a loss in momentum in economic activity.