What do the latest inflation print show? Is inflation in India moving lower?

The RBI’s efforts to rein in inflation appears to be paying off. For the first time in calendar 2022, retail inflation, measured by the Consumer Price Index, has fallen below the 6 per cent mark — the upper tolerance level of RBI’s inflation target. At 5.88 per cent, the inflation print in November is the lowest in 11 months; in October it was 6.77 per cent.

The decline in wholesale price inflation is even sharper. From 16.63 per cent in May, it is down to 5.85 per cent in November. Decline in inflation for producers bodes well for the future trajectory of inflation in India.

Which components are fuelling inflation as of now?

Under the food category, price of cereals (12.96 per cent), milk and products (8.16 per cent) and spices (19.52 per cent) remain elevated though prices of vegetables have declined significantly.

Inflation in fuel and light continue to be high (10.62 per cent), hurting consumers. Though global crude oil prices have corrected and India is procuring cheaper crude oil from Russia, there isn’t much relief at petrol pumps for consumers.

Revival in economic activity is increasing the demand for clothing and footwear (9.83 per cent) and this inflation is likely to sustain as the wedding season gets underway in the winter months.

And core inflation — excluding food and fuel items — continues to be sticky at around 6 per cent as the cost of higher fuel and input costs cascades to all the goods and services in the economy.

Why is the RBI continuing to give precedence to inflation over growth?

The RBI moved to the Fixed Inflation Targeting (FIT) regime from May 2016, wherein it is bound to control the CPI inflation below the upper band of 6 per cent. According to the recent monetary policy document, the central bank is projecting CPI for Q4 FY23 at 5.9 per cent.

There is a strong likelihood that this projection may be exceeded, owing to which the RBI has to be on high alert to keep prices under check.

Also, inflation is an invisible tax, which hurts the poor the most. Economists are generally of the view that relatively low, steady rate of inflation is needed to foster growth.

It was in a bid to control inflation that the RBI hiked its policy repo rate by 225 basis points since May this year — that is, from 4 per cent to 6.25 per cent now. But this may not be enough.

What did the RBI Governor mean when he said that he is keeping an Arjuna’s eye on inflation?

What RBI Governor Shaktikanta Das was alluding to is that the central bank, like the great warrior Arjuna, who had to consider various factors before striking the revolving fish during the famous Swayamvara, will keep a keen eye on the evolving inflation. Das has promised that policy actions will be nimble, taking into account macroeconomic, financial and commodity market developments.

How is the global situation as regards inflation?

After hitting multi-decade highs, global inflation appears to be retreating, but slowly. The IMF, in its World Economic Outlook (October), estimates global inflation to fall from 8.8 per cent in 2022 to 6.5 per cent in 2023.

In the US, CPI rose 7.1 per cent in November, the smallest increase since December 2021. The OECD expects inflation in the region to decline from 9.4 per cent to 6.5 per cent in 2023. As inflation levels are still on the high side, central banks in most advanced economies are expected to continue monetary policy tightening to anchor inflation expectations.

The battle against inflation is, therefore, far from over, especially as supply chains haven’t been fully restored and commodity prices could rebound if China’s economy picks up steam.

Has the nature of inflation in India changed from supply driven to demand driven?

As far as the current bout of inflation is concerned, it appears to be primarily driven by disruptions in the supply of critical goods and services. This was triggered by the pandemic and kept alive by the ongoing Russia-Ukraine war.

But the strong growth in the services sector of the economy and the increase in income level of employees in this sector is leading to higher urban demand, which is reflected in higher core inflation.