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The Baseline
17 Mar 2023
Chart of the week: Inflation in India eases a bit, but remains above 6%
By Abdullah Shah

After briefly falling below the Reserve Bank of India’s upper tolerance limit of 6% in November and December 2022, India’s consumer price index (CPI) inflation has pulled above the limit  for two straight months. Even though it fell marginally by 12 bps in February, it still hit 6.44%. 

Over the past two months, CPI has risen due to a jump in food and fuel prices. In February, CPI inflation was  propelled over 6% from rising costs in the food and beverages segment. The rise in F&B was caused by high cereal and protein prices (up 16.1% YoY). Fuel and light inflation also remained high, rising close to 10% YoY.

Fuel is a major contributor to CPI, so inflation follows the overall trend in price change of India’s crude oil basket. The Indian crude oil basket consists of sour grade (Oman & Dubai average) and sweet grade (Brent Dated) of crude oil processed in Indian refineries in a ratio of approximately 75 to 25. Though inflation in the fuel and power segment has declined by 90 bps MoM to 9.9%, the crude oil basket price price is higher than December 2022 levels. 

The marginal MoM fall in CPI in February can be attributed to the fall in vegetable prices, mainly onion, tomato and potato. However, the foods and beverages segment, which has the highest weightage (39.1%), is still facing inflation, due to a sharp jump in cereal prices. 

Other major contributors to CPI are the housing, and clothing & footwear segments. The housing segment has witnessed a 20 bps MoM rise in inflation to 4.8%, while clothing & footwear inflation continues to decline for four consecutive months.

With inflation stubbornly above the 6% upper limit, economists believe that another rate hike by the RBI is imminent in April. According to Nikhil Gupta, Chief Economist of Motilal Oswal Financial Services, “The worst of inflation is likely behind us. Headline inflation could fall below 6% in March 2023 and towards 5% in the coming months. Also, a 25 bps hike in April by the RBI is almost certain." 

US consumer price index inflation also remained high in February at 6% YoY, but fell MoM, in line with economists’ expectations. After the collapse of Silicon Valley Bank and other major banks in the past week, analysts are not expecting the US Fed to hike rates in its next meeting. Investors are now waiting for March 22 to see if the US Fed will hike interest rate. Their decision could influence the outcome of RBI’s Monetary Policy Committee meeting in April.

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