Economy
Prices may keep rising but inflation will fall
Summary
India’s retail inflation rate will ease into the RBI's tolerance band of 2%-6% even if prices continue to rise for the rest of the year, Mint calculations show.
India’s retail inflation rate will ease to within the central bank’s tolerance band of 2-6% by March, even if prices continue to rise for the rest of the year as per the trend of past five years, thanks to the statistical effect of a favourable base, Mint calculations show.
While the expected moderation in the inflation rate does not necessarily mean a decline in prices from current levels, it will be helpful for the Reserve Bank of India (RBI), which is mandated to keep inflation within the 2-6% range. Inflation has been above 6% for three quarters, implying a failure of monetary policy.
Some winter months usually see deflation, or a decline in prices, in food items, which often keeps any sharp rise in the Consumer Price Index (CPI) in check between October and March.
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But last year, retail prices rose 1.4% in October—the quickest pace for this month in the previous six years, making the base favourable.
If retail prices rise each month hereon at the same average sequential pace as seen in the past five years, the CPI inflation will ease to 6.9% in October from 7.4% in September but will still be around 6.5% in February, show Mint calculations. It will then slip to 5.7% in March 2023 after staying above 6% for 14 straight months.
To understand how strongly the base effect will play out when no further price pressure is assumed, that is, the index stays the same as it was in September, the decline in CPI would be quite dramatic—from 7.4% in September to 5.9% in October and all the way down to 4.5% in March.
Analysts have also pointed out how the incoming base effect will ease inflation rates.
“CPI inflation may moderate in the coming few months as base effect emerges and prices of vegetables correct (seasonal effect comes down in winter with fresh harvest)," said Crisil in a report dated 13 October.
RBI’s projections suggest a moderation in inflation even as the central bank expressed worries over elevated imported inflationary pressures amid an appreciation in the dollar and a possible pass-through of input prices.
According to the RBI, inflation is likely to average 6.5% in October-December and 5.8% in January-March, down from 7.2% in April-September.
The monetary policy committee is deemed to have failed in upholding the mandate for maintaining price stability when average CPI inflation remains outside the 2-6% band for three quarters in a row.
RBI is now expected to send a letter to the government detailing reasons for the failure to achieve the inflation target, remedial actions proposed to be taken, and an estimate of the time within which the inflation target shall be achieved.
Against this backdrop, an expected downward trajectory of inflation due to easing price pressures and base effects may help RBI.
On the interest rate front, apart from domestic inflation, interest rate hikes by other central banks, the movement of the rupee, and growth trajectory are likely to continue playing their roles in MPC’s actions.
Economists expect MPC to hike the policy repo rate by 25-35 basis points in December.
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