Retail inflation increases to 5.37% in Feb

Upward trend continues after base year revision, mainly because of high food prices

India’s Consumer Price Index (CPI) -based inflation rose to 5.37 per cent in February, from 5.19 per cent the previous month, mainly because of high food prices. After a revision in base year in December, from 2010 to 2012, this was a third straight month to see an upward trend in the rate of retail inflation.

The rate of CPI-based inflation had stood at 4.28 per cent in December. In January, the rate was, in fact, revised upwards from the 5.11 provisional figures.

The Consumer Food Price Index (CFPI) for February stood at 6.79 per cent, compared with 6.14 per cent the previous month. During the same month a year ago, the food inflation rate had stood at 7.89 per cent (calculated by the old base year of 2010). The ‘food and beverages’ segment has a weight of 54.18 per cent on CPI.

Along with the shift in base year, the weight of items was also tweaked on the basis of the consumer expenditure survey for 2011-12, against that for 2004-05 used so far. According to the previous base year and weight, the retail inflation rate had stood at five per cent in December 2014.

Economists say inflation is expected to move up for March as well, especially because of unseasonal rainfall earlier this month. They add the central bank might wait for further data before any decision of further reduction in the repo rate.

“A heavy rainfall will see prices getting affected. We expect the prices to show a further increase in March,” says Madan Sabnavis, chief economist at CARE Ratings. Sabnavis adds he still expects the average rate of retail inflation for the January-March quarter to be comfortably below six per cent. “However, the Reserve Bank might want to look at the March inflation numbers before taking a call on further rate easing.”

 

While RBI’s next policy meet is scheduled for April 7, the CPI data for March are likely be released on April 12. RBI Governor Raghuram Rajan also has the option of cutting rates outside these policy meetings, like he has done on two instances lately.

In his Budget speech, Finance Minister Arun Jaitley announced a monetary policy body for coordination between the government and the Reserve bank of India (RBI). An agreement for it has been signed and that the RBI Act is to be amended to form the committee in 2015-16.

According to the framework, RBI’s aim will be to bring down the rate of retail inflation below six per cent by January 2016. After that, for 2016-17 and subsequent years, inflation will be maintained at four per cent, plus or minus two per cent.

The framework also states the central bank will have failed its targets if inflation was more than six per cent in three consecutive quarters of 2015-16 and following years, and below two per cent for three consecutive quarters in 2016-17 and following years. The framework requires RBI to publish every six months a document explaining the reasons for inflation and forecasts for six to 18 months from the publishing date.

INCHING UP
CPI-based inflation (YoY in %)



Retail inflation break-up for February (%)