Inflation eases below 6% for the first time in 2022

In December 2021, the retail inflation stood at 5.66%

India's retail inflation slid to an 11-month low in November, helped by a softer rise in food prices, easing the pressure on policymakers to raise interest rates and improving the prospects of loan seekers.

The consumer price index (CPI) rose 5.88 per cent from a year earlier, according to data released by the Statistics Ministry on Monday. That’s slower than a median estimate for a 6.35 per cent gain in a Bloomberg survey of economists, and compares to the 6.77 per cent pace in October.

The softer inflation numbers will bring some relief to policymakers and comfort “both households and corporate borrowers”, said Knight Frank India Director-Research Vivek Rathi.

This is the first time since December 2021 that CPI – a measure used to gauge the change in the prices of a basket of goods and services typically purchased by specific groups of households – has fallen below the 6 per cent mark.

Food inflation, which comprises nearly 40 per cent of the CPI inflation basket, rose 4.67 per cent in November, versus 7.01 per cent in October. Vegetable prices contracted by more than 8.0% year on year in November, versus some economists’ expectation of a 2.0 per cent increase.

India’s central bank has raised borrowing costs by 2.25 percentage points this year to fight inflation that stayed above its 2 per cent-6 per cent tolerance band for most of 2022.

When a central bank raises interest rates, that makes money costlier and borrowing less appealing to people, which in turn, makes them spend less and save more. When more people choose to save and demand cools off, it ends up taming the rate of increase in prices, better known as inflation.

“If the (inflation) trajectory is sustainable, (this) is good news for RBI and reinforces our belief that the central bank is near the end of its rate hike cycle,” said Kunal Kundu, India Economist at Societe Generale.

Some such as Rathi wondered if the trend was sustainable as the moderation in some of the food components such as vegetables “is mostly a seasonal movement”. Some others worried about the fact that core inflation (CPI excluding food and fuel) remained stubbornly high at 6.5%, suggesting the persistence of inherent price pressures.

“Though the magnitude of fall was surprising today…details of CPI are not so encouraging,” said MOFSL group Chief Economist Nikhil Gupta. “We maintain a 25 basis-point rate hike in February next year by the RBI.” One basis point is one-hundredth of one percentage point.

RBI Governor Shaktikanta Das, too, had also warned of the risks tied to core inflation.

“Going forward, food inflation is likely to moderate with the usual winter softening and the likelihood of a bountiful rabi harvest, but pressure points remain in the form of prices of cereals, milk and spices in the near term. The main risk is that core inflation remains sticky and elevated,” Das said last week.