India’s consumer price index (CPI)-based retail inflation saw a minor decline in February to 6.44%, from 6.52% in January. While this improvement is a relief for consumers, the figure is still above the Reserve Bank of India’s (RBI) comfort threshold of 6% for the second consecutive month. The food basket inflation rate in February eased to 5.95%, down from 6% the previous month. However, except for November and December 2022, the retail inflation rate has remained above the RBI’s upper tolerance limit of 6% since January 2022.
Although retail inflation had shown signs of subsiding, January’s higher prices of cereals, eggs, meat, fish, and milk pushed it to a three-month peak, highlighting a fresh challenge for policymakers. Despite the current economic scenario, the RBI has projected the retail inflation rate to be 6.5% for 2022-23, with the first quarter of the year to record an inflation rate of 5.7%. The central bank has also been directed by the government to maintain retail inflation at 4% with a margin of 2% on either side.
Food inflation could remain high over the next few months due to the predicted El Nino conditions in 2023, while the sticky core inflation, excluding volatile food and energy prices, provides little respite for absorbing higher food prices. Economists expect the RBI to increase the repo rate by an additional 25 bps in April while keeping its stance unchanged, with the anticipation of potential stress in the US banking system. However, the central bank is prepared to be proactive and nimble if the need arises.