Inflation Drops To 15-Month Low Of 5.66 % In March; Back In RBI's Comfort Zone

New Delhi: Retail inflation in March fell to a 15-month low of 5.66 per cent and came back to the Reserve Bank's comfort level of 6 per cent, as prices of vegetables and protein-rich items eased, showed government data released on Wednesday. The retail inflation based on Consumer Price Index (CPI) was 6.44 per cent in February 2023 and 6.95 per cent in the year-ago period. The previous low was also 5.66 in December 2021. The Reserve Bank has been mandated by the government to ensure inflation remains within the 4-6 per cent bracket. The CPI was above 6 per cent in January and February. According to the National Statistical Office (NSO), the year-on-year inflation declined in the vegetable basket by 8.51 per cent, oil and fats by 7.86 per cent and meat and fish by 1.42 per cent in March.

However, the rate of price rise in spices was high at 18.2 per cent in March, followed by 'cereals and products' by 15.27 per cent. Fruits too were expensive. The overall inflation in the food basket was 4.79 per cent in March against 5.95 per cent in February and 7.68 per cent in the year-ago period. The food basket has a weightage of 54.18 per cent in the overall CPI.

Aditi Nayar, Chief Economist and Head Research and Outreach, Icra, said unless the feared heatwave leads to a rapid rise in prices of perishables, inflation may report a substantial base-effect led drop to around 5-5.2 per cent in the next two prints, which will reinforce the decision of the RBI's Monetary Policy Committee (MPC) to pause key interest rate in April 2023.

"With reasonably healthy reservoir levels, and the El Nino expected to materialise only in the second half of the monsoon season, kharif sowing may not be impacted. However, any subsequent deficiency in monsoon rainfall could affect yields and food inflation, which along with any further hardening in crude oil prices remains a risk for the inflation trajectory," she opined.

Narinder Wadhwa, National President of Commodity Participants Association of India (CPAI), said the decline in inflation is a positive development for the Indian economy, as it suggests that inflationary pressures are easing, which can be beneficial for consumers and businesses alike. Retail inflation had remained above the RBI's upper tolerance level of 6 per cent since January 2022, except for November and December 2022.

"Lower inflation can lead to a decrease in the cost of living, making goods and services more affordable for consumers. Additionally, it can help to boost business and investment confidence, leading to increased economic activity," Wadhwa said. Assocham Secretary General Deepak Sood said it is a matter of relief that India's inflation has started to drop on the back of a decline in the indices for several food items, including vegetables and edible oils.

The decline in the CPI-measured inflation in March justifies the pause mode of policy rates by the RBI earlier this month. "Hopefully, as the Rabi procurement of wheat and other cereals picks up, prices should further ease their pace, reversing the interest rate trajectory, which had kept an upward pace since May, last year," he said. The Reserve Bank, which mainly factors in CPI while arriving at its bi-monthly monetary policy, had paused its rate hike spree in April as global banking woes added uncertainty to the economic outlook.

The RBI has also lowered its inflation forecast to 5.2 per cent for 2023-24 from 5.3 per cent, with Governor Shaktikanta Das saying "war against inflation has to continue". Nayar further said by the time the MPC meets at its next scheduled meeting in June 2023, the monsoon rains would be underway, giving a little more clarity into the likely outcome for the first half of the monsoon season.

"This information would influence whether the MPC's CPI inflation projection of 5.2 per cent for FY 2024 needs to be modified. We expect the June 2023 MPC decision to be highly data-dependent," she added.
NSO collects price data from selected 1,114 urban markets and 1,181 villages across the country. During March 2023, it collected prices from 100 per cent of villages and 98.5 per cent of urban markets.