After 7 months, retail inflation breaches RBI upper tolerance limit in Jan

India’s retail inflation rate breached the upper tolerance limit of the central bank after a gap of seven months in January while wholesale price inflation rate remained in double digits for the tenth consecutive month, making inflationary management challenging amid faltering growth in Asia’s third largest economy.

Data released by the statistics department showed consumer price index (CPI) based inflation rate touched 6.01 percent in January driven by food and beverages, clothing and footwear. An unfavourable base effect led to a sharp turnaround in vegetables from a disinflation of 3 percent in December 2021 to a 14-month high inflation of 5.2 percent in January 2022. However, core inflation that excludes volatile food and fuel prices eased to 5.82 percent in January from 5.85 percent in the preceding month.

Separately, data released by the industry department showed wholesale price index (WPI) based inflation rate eased to 12.96 percent in January from 13.56 percent in the preceding month. During January, while inflation for manufactured items decelerated to 9.42 percent, food inflation rate accelerated to double digits at 10.33 percent mostly due to an unfavourable base. Fuel inflation rate marginally eased to 32.27 per cent in January from 32.3 per cent in December.

Sunil Kumar Sinha, principal economist, India Ratings and Research said though Covid cases are ebbing, heightened geopolitical risks will keep the energy prices and thus inflation at elevated levels. “Against this backdrop, we expect the wholesale inflation to be in double-digits and retail inflation close to the upper tolerance band of RBI during the rest of the current fiscal,” he added.

Madan Sabnavis, chief economist at Bank of Baroda said the main challenge is that the high numbers are witnessed in the non-food segments of retail inflation with clothing, fuel and light, household goods, health, transport and communication and recreation registering inflation above 6 percent. “These prices are based on the MRP (maximum retail price) 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,” he added.

Sabnavis however believes the high base effect for February and March will temper the retail inflation and dragging it back towards the 5% mark. “The critical element will be in March when the elections conclude as this is the time there can a fresh round of increase in fuel prices,” he added.

Brent crude is near a seven year high at $95 per barrel on fears of a possible Russian invasion of Ukraine. Indian oil marketing companies have not increased fuel prices for over three months coinciding with assembly elections in five states which is scheduled to end on 7 March.

The Monetary Policy Committee of the Reserve Bank of India last week kept key policy rates unchanged, contrary to expectations of a hike in the reverse repo rate, flagging the need to revive and sustain growth on a durable basis. India’s December factory output growth decelerated to its lowest in 10 months at 0.4 percent, signalling fragility of India’s growth momentum.

The MPC has retained its inflation projection at 5.3 percent for FY22 and has estimated 4.5 percent inflation for FY23, assuming a normal monsoon. “Inflation is likely to moderate in H1:FY23 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 added.