Retail inflation rises to 6.52% in January, breaches RBI's tolerance limit

After declining for two months, India’s retail inflation saw a surge in January. According to the data released by the Ministry of Statistics and Programme Implementation, the retail inflation for the month of January was 6.52%, breaching the upper tolerance limit of 6% set by the Reserve Bank of India (RBI).

Although a surge in retail inflation was expected due to an unfavourable base from last year, the surge from 5.72% in December to 6.52% in January was higher than street expectations. The Consumer Price Index (CPI) basket has witnessed a rise in food prices which account for nearly 40% of the basket. This is one of the reasons why we have seen a surge in inflation over the past month.

What does the data say?

The inflation in the prices of food items in the CPI basket saw an increase to 5.94% from the 4.19% reported in the previous month. On a year-on-year basis, the inflation in rural areas increased by 6.65% while the urban inflation increased by 4.79% during January.

Fuel and light saw a surge of 10.84% in inflation while a 9.08% surge in prices was seen in clothing and footwear on a year-on-year basis. Similarly, inflation in the prices of household goods jumped by 7.26%, education by 5.83%, health by 6.36% and, personal care and effects by 9.83%.

According to a survey conducted in January by RBI, consumer goods and durables are likely to see more price pressures over the next 3 months. The RBI’s inflation forecast for FY23 and FY24 stood at 6.5% and 5.3% respectively.

RBI’s Expectations

Last week, the RBI’s Monetary Policy Committee in its policy review meeting announced a small hike of 25 basis points (bps) in the repo rate while maintaining its stance at “withdrawal of accommodation”. The central bank has a target to keep inflation within a band of 2-6%.

The RBI, along with central banks of other major economies have been steadily increasing interest rates since early 2022 in order to curb soaring inflation. Due to certain major geopolitical events like the Russia-Ukraine war, inflation around the world has been rising. Since May 2022, RBI has hiked the interest rate by 225 basis points.

In its latest policy review, RBI forecast retail inflation for FY23 at 6.5% with Q4FY23 at 5.7%. RBI projected FY24 retail inflation at 5.3% with Q1 at 5%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.6%.