Retail inflation climbs to 6.95% on food prices

NEW DELHI: Two key economic statistics released by the National Statistical Office on April 12 have underlined the low-growth, highinflation threat for the Indian economy once again: inflation at almost 7% and factory output at under 2%. With inflation likely to be higher in April, the Reserve Bank of India may well have no option but to start increasing interest rates from June.

India’s benchmark inflation, as measured by the Consumer Price Index (CPI), jumped to 6.95%, the highest in 17 months, in the month of March. This is significantly higher than what analysts expected. A Bloomberg poll of economists projected March CPI at 6.4%. This was the third consecutive month when CPI has stayed above the upper limit of RBI’s tolerance band of 6%.

Meanwhile, the Index of Industrial Production (IIP), which captures the trend in mining, manufacturing and construction sector activity, posted a muted growth of just 1.7% in February 2022, a full percentage point lower than a Bloomberg forecast of economists.

These numbers offer a retrospective vindication for RBI’s Monetary Policy Committee, which in its resolution on April 8, made upward and downward revisions to its inflation and growth projections for fiscal year 2022-23. MPC now expects India’s 2022-23 GDP growth to be 7.2% (the forecast was 7.8% in February) and retail inflation to be 5.7% (4.5% in February). While the headline growth number of 7.2% for 2022-23 appears to be reasonably high, filtering out the base effect from quarterly growth numbers presents a more sober picture.

MPC also made it clear that going forward the policy focus will be “to ensure that inflation remains within the target going forward, while supporting growth”, a change from its previous objective of “an accommodative stance as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy”. Things could get worse. The latest CPI data does not capture the full impact of fuel price hikes that began from March 21. In fact, inflation in the fuel and light sub-category has come down from 8.73% in February 2022 to 7.52% in March 2022. Petrol prices in Delhi increased from ₹95.41 per litre on March 21, 2022 to ₹101.81 per litre by March 31. The prices increased to ₹105.41 by April 12.

In fact, the biggest tailwind to March inflation numbers has come from food prices.