By Prarthana Mitra
India’s retail inflation cooled to a 4-month low at 4.44 percent in February from 5.07 percent in January, according to reports.. The rate of price rise in the consumer segment and fuel prices, according to the Hindu, were at their lowest at 3.26 per cent and 6.80 per cent respectively in February.
According to a poll conducted by 30 economists, the unimpeded rise in CPI – the country’s primary metric for measuring consumer price inflation – slowed in February, for the first time since November, when it was recorded at 4.88 percent. Prices of vegetables and other perishable goods have also dropped, according to the Week.
A Abhishek Upadhyay, an economist at ICICI Securities Primary Dealership told Reuters in February, “We expect a sharp retreat in inflation in February led by a fall in perishable food prices that earlier forced the inflation upsurge from lows in June 2017.”
Implications of a sharp decline in CPI for the country’s economic future
News of the lowest inflation rate recorded for the first time in four months has been a source of great relief for policymakers and businessmen alike. It appears a delicate balance between market pressure to increase retail prices, and letting economic activities boom, especially in retail, has been achieved.
According to Reuters however, the small reprieve, if it comes, won’t likely last very long. The Reserve Bank of India (RBI) expects inflation to further increase to 5.1-5.6 percent between April to September, especially against the central government’s expansionary budget.
Does the drop in retail inflation rate spell a new dawn for India’s economy?
RBI’s flexible inflation targeting strategy to tackle inflation was introduced two years ago, and enabled the government to regulate and limit all circulation and supply of money across the economy. Inflation expectations are now considered to be more stable than before, which in turn has helped rebuild the the Monetary Policy Committee’s (MPC) credibility to a certain extent.
The MPC is an independent body working under the central bank, which makes decisions on issues such as monetary policy, including changing policy rates, such as the repo rate and reverse repo rate. Economic experts with Qrius said that an increase in the repo rate increases the borrowing cost for banks, which leads to a higher interest rate, thus making it challenging for investors. This would in turn reduce both investment spending and sale of consumer durables.