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Retail inflation based on Consumer Price in February is likely to have closed in February around 5 per cent. Government’s Statistics Office will officially declare the data on Tuesday evening.
Also read: Inflation targeting: Evaluating the relevance of India’s 2-4% framework
Retail inflation rate was 5.1 per cent in January, which was three months low. If the official figure for February is around 5 per cent, this means it will be within Reserve Bank of India‘s tolerance level of 2-6 per cent for six consecutive months. However, it will be the 53rd consecutive weeks when headline number would be more than median rate of 4 per cent.
If the rate remains below 6 per cent, this could mean there will be no change in tentative schedule of revision in policy interest rate, better known as repo rate (rate at which RBI lends money to banks) will remain the same. Expectation is that rate revision could take place during second half of the next fiscal i.e., 2024-25.
Though core inflation (headline inflation minus volatile inflation of food and fuel) is moderate and slipped to 3.6 per cent in January, headline will not be affected because of continuous rise in food prices.
Key factors
According to a research report by State Bank of India, since the decline in core is visible in both rural and urban areas and in goods and services that are quintessential to day-to-day living, to conclude that core decline is a proxy for decline in demand or rural slowdown is misleading.
For example, the 41-bps decline in weighted contribution in clothing and footwear/household goods & services is due to decline in items like saree, shirt, trouser, clothing material, washing soap, bedsheet, etc. that are part of daily living and hence don’t indicate that demand is not happening. The only reason for these phenomena could be the changing purchasing behaviour of customers.
“We believe that people are actively using e-commerce websites to buy these essentials (preferably at discounted price) & hence demand is migrating from offline to online mode. if this is durable, then core inflation decline could be enduring,” the report said. Further, if this is sustained the decline in core could become more enduring in nature opening up space for policy rate cuts. Keeping all these in mind, CPI inflation is expected to remain slightly above 5 per cent in the remaining two months of this fiscal leading to an average inflation of 5.4 per cent in FY24.
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