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Published: Feb 15, 2023
Updated: Feb 15, 2023

India's Retail Inflation Breaches RBI's Tolerance Level for the First Time Since October, Amidst Rising Food Prices

India's annual retail inflation in January rose above the Reserve Bank of India's (RBI) upper threshold for the first time in three months, on the back of higher food prices, vindicating last week's hawkish monetary policy stance.

According to government data, India's annual retail inflation rate rose to 6.52% in January from 5.72% in December. January's retail inflation was above the Reserve Bank of India's upper targeted limit of 6% for the first time since October and much higher than the 5.9% estimate, according to a Reuters poll of 44 analysts.

Food price inflation, which accounts for nearly 40% of the consumer price index (CPI) basket, rose to 5.94% in January from 4.19% in December. The prices of cereals and milk continued to increase. Prices of cereals rose more than 16% year-on-year, milk rose 8.8% and eggs rose by 8.8% from last year, even as prices of vegetables fell 11.7%.

RBI increased rates by 25 basis points last week

Last week, the Reserve Bank of India (RBI) hiked its key repo rate by a quarter percentage point and surprised markets by leaving the door open to more tightening, saying core inflation remained high. The likelihood of more rate hikes, which had diminished after two previous inflation prints of below 6%, has now increased as the latest figure confirms the RBI's fear, economists said.

More rate hikes likely

India's core inflation in January was nearly flat at 6.09% to 6.10% from last month, according to two economists. "We expect core inflation to remain elevated in Feb-March given the ongoing pass-through of higher input costs by producers," said Aditi Nayar, chief economist at ICRA. Household goods prices rose 6.2%, health and personal care products have registered high inflation of above 6%, Madan Sabnavis, economist at Bank of Baroda, said.

Some economists now expect inflation to remain above RBI's upper tolerance band of 2%-6% for the next two months, forcing the central bank to continue its aggressive tightening cycle, hurting economic growth that had started to take root. India's Economic Survey forecast economic growth of 6% to 6.8% in the 2023/24 fiscal year, slowing from the 7% growth projected for the current year ending on March 31.

Will impact MSMEs and middle class income groups

The rise in inflation is likely to impact the general population and businesses, particularly small and medium-sized enterprises that may have to absorb higher costs without the ability to pass them on to consumers. Higher inflation can lead to lower purchasing power and reduce the ability to spend on discretionary items, leading to lower demand and eventually, lower economic growth.

Inflation concerns remain high

Rising food prices and elevated core inflation have led to India's retail inflation breaching the RBI's tolerance level for the first time since October. The possibility of continued high inflation may result in further rate hikes, hurting economic growth. The RBI's aggressive tightening cycle may impact businesses and consumers, leading to reduced spending power and a reduction in demand for discretionary items.