CPI inflation drops to 15-month low of 5.66% in March

India's headline retail inflation rate crashed below the Reserve Bank of India's (RBI) 6 percent upper-bound in March, data released on April 12 by the Ministry of Statistics and Programme Implementation showed. As per the statistics ministry's data, Consumer Price Index (CPI) inflation fell to 5.66 percent last month from 6.44 percent in February.

At 5.66 percent, the latest CPI inflation print is the lowest in 15 months, having come in at 5.66 percent in December 2021. It is also broadly in line with consensus estimates.

A Moneycontrol survey showed economists expected headline retail inflation to fall to 5.7 percent in March.

Despite inflation returning to the RBI's tolerance band of 2-6 percent after two months outside it, it has now been above the medium-term target of 4 percent for 42 months in a row.

Inflation internals

The sharp drop of 78 basis points in inflation in March was largely due to a favourable base effect, with the general index of the CPI having jumped by 1 percent month-on-month in March 2022, creating a high base for last month's inflation print.

One basis point is one-hundredth of a percentage point.

An even larger base effect helped bring down food inflation to 4.79 percent in March from 5.95 percent in February.

In terms of price momentum, the biggest drag on inflation were edible oils, whose index fell by 2.6 percent in March on a month-on-month basis.

On the whole, the Consumer Food Price Index rose 0.3 percent month-on-month in March.

Food apart, there was little sequential movement, with no change in the 'fuel and light' and 'housing' groups' indices. However, the indices for 'clothing and footwear' and 'miscellaneous' items were both up 0.3 percent from February.

Core inflation, or inflation excluding volatile food and fuel items, eased to 5.8 percent in March from 6.1 percent in February.

"There was a relatively larger step-up in prices of some services in the post-pandemic period, following the reopening in the economy. However, annual changes in the services segment are likely to be of a smaller quantum going ahead, which may lead to some tempering in the core inflation in 2023-24," noted Aditi Nayar, chief economist at ICRA.

Policy impact

The latest inflation reading of 5.66 percent takes the average for January-March to 6.2 percent, in line with the RBI's latest forecast of 6.2 percent, contained in the April edition of the six-monthly Monetary Policy Report. For 2022-23 as a whole, headline retail inflation has averaged 6.7 percent.

The central bank expects inflation to moderate to 5.2 percent in 2023-24, with the quarterly forecasts ranging from 5.1 percent to 5.4 percent.

While inflation is seen remaining above the medium-term target of 4 percent for the foreseeable future – the Monetary Policy Report sees inflation averaging 4.4 percent even in the last quarter of 2024-25 – the central bank's Monetary Policy Committee (MPC) is widely expected to be in a 'prolonged pause' when it comes to interest rates.

Last week, the MPC surprised markets by leaving the repo rate unchanged at 6.5 percent against expectations of a hike of 25 basis points. The rate-setting panel cited the need to see the impact of its 250 basis points worth of rate hikes it effected in 2022-23, adding that it stood ready to act should the need arise. However, economists don't think the MPC will raise interest rates any further unless inflation again moves to the 6 percent-plus territory.

"The fear that 'speed can kill' has led to a dovish turn in DM Central banks and RBI is also having a rub-off of the same. The pause is here to stay for atleast 2-3 quarters before we get a pivot in the form of a cut," said Madhavi Arora, lead economist at Emkay Global Financial Services.

The MPC is scheduled to next meet during June 6-8.