India’s Retail Inflation Steadies at 5.09% as Rising Food Prices Exert Pressure

India's retail inflation remained unchanged at 5.09% in February, with higher food prices exerting pressure on the economy. Despite moderation in other categories, food inflation marginally increased to 7.8%, reflecting challenges in managing price pressures.

Retail inflation in India maintained its stability at 5.09% in February, reflecting the sustained pressure exerted by higher food prices on the economy. Despite efforts to curb inflation, particularly in food categories such as cereals, pulses, spices, and vegetables, the marginal increase in food inflation to 7.8% underscored the persistent challenge faced by policymakers. This stability in inflation comes on the backdrop of industrial growth slipping to 3.8% in January, primarily attributed to subdued performances in manufacturing, mining, and power sectors.

Food Inflation Inching Higher

The food basket witnessed an increase in inflation, rising to 8.66% in February from 8.3% in January. Rajini Sinha, chief economist at CareEdge, pointed out that food inflation inched up marginally to 7.8%, reversing the trend from the previous month. "The ongoing high inflation in specific food categories, including cereals, pulses, spices, and vegetables, pose a risk of potentially broadening price pressures and de-anchoring inflationary expectations," Sinha added.

Vegetable inflation emerged as the highest contributor to the food basket, with onion prices continuing to rise. Madan Sabnavis, chief economist at Bank of Baroda, cautioned that vegetable inflation is likely to persist, as horticulture output this year is expected to be lower than the previous year.

Core Inflation Eases to Multi-Year Low

On a positive note, core inflation, which excludes food and fuel prices, eased to 3.35% in February, marking the lowest level since at least 2018, according to economists. This suggests that the Indian economy is far from overheated at the moment.

Additionally, the Index of Industrial Production (IIP) data revealed a slowdown in industrial growth to 3.8% in January, mainly due to the poor performance of the manufacturing, mining, and power sectors. The IIP growth stood at 5.8% in January 2023 and 4.2% in December 2023.

Experts Weigh In

Vivek Rathi, National Director Research at Knight Frank India, stated, "Excluding food, prices, all other categories have moderated compared to last year, with fuel inflation showing a decline of 0.8%. Core inflation is also decreasing, alleviating pressure on households. And while still high, the gradual decline in inflation supports growth in consumption-driven sectors, including real estate and the broader economy."

Looking ahead, Dharmakirti Joshi, Chief Economist at CRISIL Ltd., expects CPI inflation to continue softening in the next fiscal year to 4.5%, supported by assumptions of a normal monsoon, softer domestic demand, and benign global oil prices. Given these factors, the Monetary Policy Committee might hold the repo rate steady until at least its June policy review.

SBI Research anticipates CPI inflation to remain slightly above 5% until May and decline thereafter to 3% in July. They project inflation to stay below 5% beginning November until the end of the fiscal year 2024-25.

While the RBI's target of 4% inflation remains elusive, the moderation in core inflation and the gradual decline in overall prices provide some relief to policymakers and households alike. However, the ongoing risks from food inflation, particularly in specific categories, warrant cautious monitoring and appropriate policy measures to anchor inflationary expectations.