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Retail inflation gallops to 6.52% in January, increases possibility of another rate hike

The latest inflation data comes days after the Reserve Bank of India raised the policy repo rate by 25 basis points to 6.5 percent. For 2023-24, the central bank has forecast an average inflation rate of 5.3 percent.

February 14, 2023 / 08:17 AM IST
Headline retail inflation has now been above the medium-term target of 4 percent for 40 consecutive months.

Headline retail inflation has now been above the medium-term target of 4 percent for 40 consecutive months.

India's headline retail inflation rate jumped to a three-month high of 6.52 percent in January from December's one-year low of 5.72 percent, data from the Ministry of Statistics and Programme Implementation showed.

At 6.52 percent, the latest Consumer Price Index (CPI) inflation print is significantly above the consensus estimate.

As per a Moneycontrol poll of 17 economists, inflation was seen rising to 6.1 percent in January.

Retail inflation has returned to 6 percent-plus territory after a two-month break. As for the medium-term target of 4 percent, CPI inflation has now been above it for 40 months in a row.

After being above the upper bound of the Reserve Bank of India's (RBI) mandated 2-6 percent target range for the first 10 months of 2022 - a period in which the central bank failed to meet its inflation mandate - CPI inflation eased to 5.88 percent and 5.72 percent in November and December, respectively. However, it rose far more than expected last month, with none of the economists polled by Moneycontrol predicting such a sharp increase.

January inflation internals

The rise in headline inflation in January was led by food components, whose inflation shot up to 5.94 percent from 4.19 percent in December.

While food inflation was seen rising in January due to an unfavourable base effect, the increase has been far more than expected, indicating a rise in price pressures.

  Meat, fish6.04%0.8%
  Oils, fats1.41%-0.6%
Clothing, footwear9.08%0.4%
Fuel, light10.84%0.0%

Within food, the greatest increase in prices on a month-on-month basis was seen in cereals, eggs, and spices. Also on the rise were prices of meat, fish and milk.

Meanwhile, vegetables, edible oils, and sugar prices were lower in January compared to the previous month.

On the whole, the food index of the CPI rose 0.3 percent month-on-month in January, while the overall general index of the CPI was up 0.5 percent from December.

Adding to the price momentum was the housing component of the CPI, which was up 0.8 percent on a sequential basis.

The index for housing, which is one of the six major group of items in the CPI basket, rose the most on a month-on-month basis in January, followed by miscellaneous (+0.5 percent).

In fact, none of the six major groups posted a sequential decline in January, although the fuel index was unchanged from December.

Core inflation, or inflation excluding food and fuel, was unchanged at 6.1 percent in January, according to Moneycontrol calculations.

Policy impact

The latest inflation data comes days after the RBI's Monetary Policy Committee (MPC) increased the policy repo rate by 25 basis points to 6.5 percent, making it the sixth interest rate hike by the Indian central bank in 10 months.

On February 8, the RBI lowered its inflation forecast for the current financial year by 20 basis points to 6.5 percent, with inflation seen averaging 5.7 percent in January-March.

One basis point is one-hundredth of a percentage point.

For 2023-24, the central bank has forecast an average inflation rate of 5.3 percent: 5 percent in April-June, 5.4 percent in both July-September and October-December, and 5.6 percent in January-March 2024.

Economists think the RBI’s inflation forecast for next year is a bit too high, with Governor Shaktikanta Das nearly admitting as much.

"The forward markets are giving a much more benign picture with regards to the oil prices but we have been very conservative in our assessment," Das said on February 11 after the central bank's customary post-Budget board meeting in the Capital.

The RBI's forecast assumes a price of $95 per barrel for India's crude oil basket. This is nearly 20 percent higher than current levels.

Siddharth Upasani is a Special Correspondent at Moneycontrol. He has been covering the Indian economy, economic data, and monetary and fiscal policies for nine years. He tweets at @SiddharthUbiWan. Contact:
first published: Feb 13, 2023 05:35 pm