India's headline retail inflation rate edged down to 6.44 percent in February from a three-month high of 6.52 percent hit in January, data released by the ministry of statistics and programme implementation showed.
At 6.44 percent, the latest Consumer Price Index (CPI) inflation print falls in line with consensus estimates. In a Moneycontrol survey, economists expected inflation to ease to 6.4 percent in February.
Retail inflation has now been above the Reserve Bank of India's (RBI) medium-term target of 4 percent for 41 months in a row.
The minor eight-basis-point decline in retail inflation comes after it rose far more than expected to 6.52 percent in January.
Moneycontrol exclusively reported on March 9 that the sharp increase in January CPI inflation— from 5.72 percent in December — was on account of a tweak in the methodology following the provision of free foodgrain through the Public Distribution System.
One basis point is one-hundredth of a percentage point.
Inflation internals
Like the headline inflation rate, food inflation also cooled a bit in February to 5.95 percent from 6 percent in the previous month.
The biggest factors in bringing down food inflation were eggs, vegetables, edible oils, and meat and fish, with the index for these sub-groups of the CPI falling 5.7 percent, 2.5 percent, 1.7 percent and 1.6 percent, respectively, month on month.
However, the index for fruits was up 3.3 percent sequentially, while that of cereals registered an increase of 0.9 percent following a 2.6 percent rise in January.
The sharp rise in the cereals index caught economists by surprise in January, who pointed out that a manual computation of the same by using the 20 individual components of the "cereals and products" subgroup showed the increase to be far lower, resulting in a headline CPI inflation rate that was 20-35 basis points lower than 6.52 percent.
| FEB 2023 INFLATION | CHANGE IN INDEX, FEB 2023 vs JAN 2023 | |
| CPI | 6.44% | 0.2% |
| Food | 5.95% | -0.2% |
| Cereals | 16.73% | 0.7% |
| Meat, fish | 3.39% | -1.6% |
| Oils, fats | -0.49% | -1.7% |
| Vegetables | -11.61% | -2.5% |
| Pulses | 4.09% | -0.3% |
| Clothing, footwear | 8.79% | 0.4% |
| Housing | 4.83% | 0.8% |
| Fuel, light | 9.90% | 0.1% |
| Miscellaneous | 6.12% | 0.4% |
Moneycontrol then reported that the unexpected increase was being caused by the government's provision of free foodgrain through the Public Distribution System (PDS) under the National Food Security Act.
As per an internationally-accepted methodology, free social transfers in kind — such as goods and services provided free of charge to households by governments — are to be excluded from the scope of the CPI. As such, the weight of two items in the CPI basket — PDS rice and PDS wheat/atta, accounting for 0.54 percent of the CPI basket — was cut to zero and their weight distributed pro-rata to other items in the food group.
Policy impact
The latest inflation reading of 6.44 percent is the second consecutive month that it has come in above the 6 percent upper-bound of the RBI's mandated target range, taking the average for January-February to 6.5 percent, as against the central bank's forecast of 5.7 percent for the current quarter.
While it piles pressure on the Reserve Bank of India's Monetary Policy Committee (MPC) to deliver another repo rate hike in early April, it is unclear how the rate-setting panel will treat the higher inflation prints caused by the statistical effect due to the change in computation methodology on account of the free PDS foodgrain.
In recent meetings, the MPC has also focussed on core inflation, saying it was important to break its persistence.
As per Moneycontrol's calculations, the data released on March 13 showed core CPI inflation was 6.1 percent in February, little changed from January.
The MPC is set to meet during April 3-6. In its last meeting, it increased the repo rate by 25 basis points to 6.5 percent.