India's Retail Inflation Slows to 6.4% in February, But Remains Above RBI's Tolerance Limit

In February, retail inflation in India fell to 6.44%.

Retail inflation in India fell marginally to 6.44 percent year on year in February, from 6.52 percent in January, according to data released on Monday by the Ministry of Statistics and Programme Implementation.

Inflation fell by 0.17 percent sequentially. For the second month in a row, inflation has remained above the Reserve Bank of India's (RBI) tolerance band of 2-6 percent.

Rising food prices, which account for nearly 40% of the Consumer Price Index (CPI) basket, are to blame for the high inflation rate. In February, food inflation was 5.95 percent.

The inflation rate for vegetables fell by 11.6 percent, compared to an 11.7 percent drop the previous month. Meanwhile, the fuel and light inflation rate fell to 9.90% in February from 10.84% in January.

"While elevated, February CPI inflation of 6.44 percent is broadly in line with expectations. Cereals and milk inflation remain high, while fruit inflation increased in February. Core inflation remains elevated and sticky at 6.1 percent, with relatively high inflation in clothing and footwear, health, personal care and effects, and household goods/services. The RBI's policy will remain hawkish in April, as inflation prints have risen back above 6% in January-February, with core inflation remaining stubbornly above 6%. We continue to anticipate a 25 basis point increase in repo rates in the April policy "Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, agreed.

Higher inflation has been a source of concern for central banks around the world, including India, as the uncertain nature of the Russia-Ukraine war exacerbated supply-side disruptions in a post-pandemic world still in the early stages of recovery from economic shocks.

The RBI is expected to keep inflation within a 2-6 percent range. To combat inflation, it has raised lending rates. Previously, in February, the RBI raised the policy repo rate by a quarter-percentage point.

The RBI reduced India's inflation forecast for this fiscal year as the worst price pressures were seen to be behind us, but Governor Shaktikanta Das raised concerns about the stickiness of core inflation during the Monetary Policy Committee meeting on February 8.

Rising inflation levels indicate that the central bank will raise interest rates. According to Bloomberg, another rate hike by the RBI could push borrowing costs to a seven-year high.

DBS Group Research Executive Director & Senior Economist Radhika Rao stated in an online session on 'Growth resilience and sticky inflation' that the RBI may raise interest rates by 25 basis points in April and maintain a hawkish bias because retail inflation remains high.

The RBI predicted retail inflation of 6.5 percent for FY23 and 5.7 percent for Q4. Retail inflation is expected to be 5.3 percent in FY24, with 5% in Q1, 5.4 percent in Q2, 5.4 percent in Q3, and 5.6 percent in Q4.

To combat inflation, the RBI has raised the short-term lending rate by 225 basis points since May of last year.

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