Retail inflation based on the Consumer Price Index (CPI) remained within the RBI’s target range for the second consecutive month.

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Money MONEY Friday, February 12, 2021 - 21:52

Retail inflation eased to a 16-month low of 4.06% in January, mainly on account of softening of food and vegetable prices, government data showed on Friday. It is for the second consecutive month that retail inflation based on the Consumer Price Index (CPI) has remained within the target range of the Reserve Bank of India (RBI), which is 4% (+/-2%).

The retail inflation stood at 4.59% in December 2020 and 7.59% in January 2020. The previous low for retail inflation was in September 2019 at 4%. The rate of price rise in the food basket was 1.89% in January this year, which is significantly lower than 3.41% in December, revealed the data released by the National Statistical Office (NSO).

"Driven by a fairly broad-based moderation in the food inflation, the CPI inflation in January 2021 softened appreciably to a 16-month low... Food prices have displayed a mixed trend so far in February 2021. The rise in onion prices, as well as higher crude oil prices and their transmission into retail fuel prices are areas of concern that need to be monitored," said Aditi Nayar, principal economist, Investment Information and Crediting Agency (ICRA).


Vegetable prices showed further decline during the month, with a negative inflation print of 15.84%, while that of pulses and products eased to 13.39%. Inflation in vegetable prices was (-)10.41% and pulses and products at 15.98% in the preceding month (December 2020).

Likewise, meat, fish, eggs and milk and products witnessed softening of inflation at 12.54%, 12.85% and 2.73%, respectively. The rate of price rise in the fuel and light category, however, picked up to 3.87% as against 2.99%.

Nayar also said that in an uncomfortable trend, many of the non-food categories recorded a rise in inflation in January 2021, with inflation expected to resume an uptrend in February-March 2021.

"We do not think that today's softer-than-anticipated print creates the room for an imminent rate cut. If the pace of growth in Q4 FY2021 exceeds the prevailing tepid expectations, the stance may be revised to neutral in the June 2021 MPC review," she opined.

Earlier this month, the RBI lowered the retail inflation projection for the ongoing quarter of this fiscal at 5.2%, saying it has returned within the "tolerance band".

The regulator expects retail inflation to be around 5.2-5% in the first half of next fiscal year, before easing further to 4.3% in Q3 FY22. "The inflation rate has come well below the RBI's threshold rate, and this actually gives some relief to the markets on the immediate trajectory of interest rates. However, core inflation is perched at 5.70%, something that may take more time to move down," said Joseph Thomas, Head of Research, Emkay Wealth Management.

Deepak Agarwal, co-founder, Moneyboxx Finance Ltd, said with inflation falling for the second consecutive month and hovering within the RBI range, the softer rate regime would continue in the near future. This will help in faster and sustained economic recovery, he added.

Sreejith Balasubramanian, Economist - Fund Management, IDFC AMC, said going forward, the base effect which helped recent lower prints will wane in February and March and the magnitude of disinflation in vegetables would also most likely ease, while the price movement in pulses and vegetable oils needs to be watched closely.

The RBI mainly factors in the retail inflation while arriving at its monetary policy. The government has mandated the central bank to ensure the inflation remains at 4%, with a margin of 2% on either side.

Price data are collected from selected towns and selected villages by the Field Operations Division of NSO, Ministry of Statistics and Programme Implementation.

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