Ajit Karn
According to the Department of Economic Affairs’ Monthly Economic Review for February 2023, the consistent moderation in wholesale inflation in India, which reached a 25-month low in February, is anticipated to soon be reflected in retail inflation.
Inflationary pressures eased in February, according to a report released on Monday, thanks to falling international commodity prices and government measures.
“As WPI inflation falls to a 25-month low, its transmission to CPI inflation is imminently anticipated. The January 2023 round of the RBI’s Households’ Inflation Expectations Survey revealed that inflation expectations among households remained stable.
According to a survey conducted by IIM Ahmedabad, there is a modest increase in business inflation expectations in the fourth quarter of 2022-23, but it is still lower than the first two quarters of the current year.
Notably, wholesale inflation in India continued to moderate in February 2023, as measured by the Wholesale Price Index, which was 3.85% (provisional) compared to 4.7% (preliminary) in January 2023. In October, the overall wholesale price index reached 8.39 and has been declining since then. Notably, the wholesale price index (WPI)-based inflation had reached double figures for eighteen consecutive months prior to September.
In February 2023, India’s retail inflation declined slightly but remained above the RBI’s upper tolerance band of 6% for the second consecutive month, with the Consumer Price Index standing at 6.444%. Retail inflation was 6.52 percent in January.
For three consecutive quarters, India’s retail inflation exceeded the RBI’s target of 6%, and it wasn’t until November 2022 that it returned to the RBI’s comfort zone.
In accordance with the flexible inflation targeting framework, the RBI is deemed to have failed to control price increases if CPI-based inflation exceeds the range of 2 to 6 percent for three consecutive quarters.
To combat inflation, the RBI has increased the short-term lending rate by a total of 250 basis points since May of last year, including the most recent increase of 25 basis points. Raising the repo rate aids in reducing economic demand, thereby aiding in inflation management. Raising interest rates is a tool of monetary policy that typically aids in stifling economic demand and reducing inflation.
According to the government’s monthly report, “extreme weather conditions such as heatwaves and the possibility of an El Nino year, volatility in international commodity prices, and the pass-through of input costs will likely determine the inflation trajectory going forward.”
In addition, the monthly review stated, citing the forecasts of various international agencies, that inflation in India will moderate in 2023-24 compared to 2022-23 and is likely to remain between 5.0 and 6.0 percent, “with risks evenly balanced.”
The Russia-Ukraine conflict and the tightening of monetary policy have once again brought corporate debt vulnerabilities to the forefront, according to the monthly review.
“This occurred after the Covid-19 pandemic had had a direct impact on the already highly leveraged balance sheets of the global corporate sector. Due to back-to-back disruptions, the risk of stressed corporate balance sheets spilling over into the balance sheets of financial institutions has increased.
However, according to the report’s analysis, India is one of the few nations with a lower corporate debt as a percentage of GDP in the third quarter of 2022 than in the corresponding quarter of 2008, when the global financial crisis began.
“Macroeconomic stability is likely to receive a further lift in FY23 as the current account deficit is projected to narrow compared to beginning-of-year projections. The increase in net service exports over the previous year is a significant development as India increases its market share in both IT and non-IT services, the demand for which has been triggered by the pandemic.
Due to the decline in global commodity prices, imports are now also less expensive.
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“With a manageable current account deficit and the highest growth rate among major economies in FY23, the Indian economy has demonstrated a newfound resilience in navigating the turbulence caused by the pandemic and geopolitical stress,” according to the review report.
