March’s retail inflation of 5.66 per cent, a 16-month low, should come as a relief to the Reserve Bank of India, after the surprisingly high inflation readings for January and February vis-a-vis its Q4 FY23 projections of 5.7 per cent. Despite March’s print, inflation for the just concluded quarter stands at 6.2 per cent. It will be no surprise if this downtrend continues for a while, as a high-base effect will be at work for the months ahead.

Inflation for March 2022 was 6.95 per cent with food inflation last year at 7.68 per cent. The fact that this number too came in on a somewhat high base points to the impact of the Ukraine war. The average CPI reading for the April-October 2022 period was 7 per cent, which implies that a projection of 5.1 per cent and 5.4 per cent for Q1 and Q2 of FY24 are within reach; it would be an embarrassment if this projection is overshot. Food prices could remain elevated if the monsoon turns out to be erratic, as is feared. While food inflation for March was 4.79 per cent, cereals inflation and milk inflation are at over 15 per cent and 9 per cent, respectively. In a year of multiple State elections, and with the general elections due next fiscal, the Centre will be edgy about food prices.

Yet, overall inflation readings that are below the 6 per cent level (actually it should be below 5 per cent to be cause for comfort) will give the MPC a chance to extend its pause, not least because the current account deficit is at 2.2 per cent of GDP, the rupee is stable and the Fed is likely to tone down its hawkishness, with US inflation too trending downwards (it was 5 per cent in March). The RBI should allow for the transmission of its 250 basis point hike since last May. The onus is now on the Centre to exercise a check on prices without straying from fiscal consolidation. Given the sense of comfort on the revenue front, it could perhaps do so by reducing excise duties on fuel, which could lower prices and spur growth.

That said, there are some deeper issues in inflation that need to be addressed — such as its ‘stickiness’ in some segments and, more fundamentally, whether the numbers put out are reliable. On the first, corporates in consumer durables and services sectors seem to be in the process of recouping losses incurred on account of high commodity prices in the last two years. The prices may have seen a downward revision vis-a-vis last year, but are higher than pre-pandemic levels. Some sectors are basically sticky, where prices once revised stay there — such as health, education and recreation. The reasons need to be understood. An annual measurement of inflation does not provide a true sense of stickiness. The RBI has in a recent paper conceded that there are methodological issues in measuring food inflation. Perspectives on growth, inflation, industrial structure, savings and debt need to be revisited in view of emerging realities.

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