Explained: India's Retail Inflation, Its Upswing & What the RBI Has Said

The previous recorded high in India's retail inflation was 8.33 percent in May 2014.

According to government data released on Thursday, 12 May, India's consumer price index (CPI)-based retail inflation climbed to an eight-year high of 7.79 percent in April.

The rise was largely driven by climbing fuel and food prices. The previous recorded high in retail inflation was 8.33 percent in May 2014.

In March 2022, the figure was 6.95 percent – making April 2022 the fourth consecutive month in which the figure stayed well above the Reserve Bank of India's (RBI) upper tolerance limit of 6 percent.

Last week, RBI Governor Shaktikanta Das announced that the Monetary Policy Committee (MPC), in an attempt to inhibit the surge in inflation, had taken a decision to increase the policy repo rate by 40 basis points to 4.40 percent.

What is Retail Inflation?

An inflation rate is indicative of the rise in prices of commodities in an economy. Retail inflation, specifically, is measured in consumer price index (CPI), which is a weighted average of prices of a basket of consumer goods and services. Therefore, retail inflation is also termed CPI-based inflation.

The CPI is the change in retail prices of goods and services which households purchase for their daily consumption, such as food articles, fuel, and services such as transportation and health care, among others.

The Ministry of Statistics and Programme Implementation (MoSPI) is responsible for compiling this data, which is measured by the rate of change in CPI over a period of time.

The Reserve Bank of India monitors this figure in view of sustaining a balance in commodity prices in the economy.

Trends in Retail Inflation

According to the Monetary Policy Report for April 2021, the inflation rate should be sustained between 2 to 6 percent, with the ideal inflation rate being 4 percent till March 2026.

Since January 2022, this percentage has witnessed a steady rise and remained above 6 percent.

In April, the MoSPI calculated the retail inflation of March to be 6.95 percent, which was a 17-month high. The food inflation in February was 6.07 per cent and in January, when it first breached the RBI limit, the retail inflation was 6.01 per cent.

A year ago in April 2021, the CPI-based inflation was well within the benchmarks set by the RBI – standing at 4.29 percent. This was an ease from the inflation rate during the same time in the previous year, 2020.

RBI's Measures to Contain Inflation

The RBI on 4 May had announced that the MPC had voted to increase policy repo rate by 40 basis points to 4.40 percent.

The Cash Reserve Ratio (CRR) was also raised by 50 basis points to 4.50 percent, effective from 21 May.

"Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 percent and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 percent," the RBI added in the statement.

The hiking of the benchmark interest rate came in an urgent policy review in a bid to contain inflation.

The central bank noted that geopolitical tensions, primarily triggered by the Russia-Ukraine war, and stabilisation of economic activity since the ebbing of the third COVID-19 wave were responsible for the move.

"Since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased," the central bank said in the statement.

The interest rate hike is aimed at strengthening and consolidating medium-term economic growth prospects, the RBI governor said, pointing out that geopolitical tensions were pushing inflation.

The statement further said, "The MPC is of the view that while economic activity is navigating the vortex of forces confronting the world with resilience on the strength of underlying fundamentals and buffers, the risks to the near-term inflation outlook are rapidly materialising... In this milieu, the MPC expects inflation to rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects."

What Do the Experts Say? 

Aditi Nayar, the chief economist at the Investment Information and Credit Rating Agency (ICRA), notes, "The surge in the CPI inflation has clearly justified the off-cycle rate hike last week, and significantly raised the likelihood of a back-to-back rate increase in June 2022," Moneycontrol quoted.

She added that ICRA is predicting a high likelihood that the Monetary Policy Committee (MPC) will increase the repo rate by 40 basis points and 35 basis points, respectively over the next two policy meetings, to 5.15 percent, after which it will pause to monitor its impact.

"As of now, we continue to see the terminal rate at 5.5 percent by the middle of 2023," she reportedly added.

Saying that inflation will remain above the RBI's upper limit of 6 percent, Nayar stated that CPI inflation may be lower than 7.79 in the month of May.

Meanwhile, Rahul Bajoria of Barclays contended for the repo rate to be raised by 50 basis points on 8 June, according to Moneycontrol.

He added, "Our calculations suggest that inflation could remain above the RBI's target band for three consecutive quarters (Q1-Q3 2022), marking the first official 'failure' of the monetary framework."

(With inputs from Moneycontrol.)