The Consumer Price Index (CPI) inflation rate in India declined to 4.7% in April 2023, according to the latest data released by the Ministry of Statistics and Programme Implementation (MoSPI). This is the lowest level of inflation since February 2022, when it was 4.1%. It is also below the Reserve Bank of India’s (RBI) upper tolerance limit of 6%, which it had breached for 14 consecutive months since March 2022.
What caused the fall in inflation?
The main reason for the fall in inflation was the easing of food prices, which have a weight of 45.86% in the CPI basket. Food inflation declined to 2.9% in April from 4.8% in March, as prices of cereals, pulses, vegetables, fruits and milk moderated. The second wave of the Covid-19 pandemic and the subsequent lockdowns imposed by various states also dampened the demand for non-essential goods and services, leading to lower inflation in categories such as clothing, footwear, transport and recreation.
What does this mean for the RBI?
The RBI has been maintaining an accommodative monetary policy stance since March 2020, when it slashed the repo rate by 75 basis points to 4%. It has kept the rate unchanged since then, despite the rising inflationary pressures, citing the need to support the economic recovery amid the pandemic. The RBI has also been conducting various liquidity-enhancing measures, such as open market operations, targeted long-term repo operations and special liquidity facilities for various sectors.
The fall in inflation below the RBI’s upper tolerance limit gives it more room to continue with its accommodative stance and support growth. However, the RBI has also cautioned that there are several upside risks to inflation, such as rising global commodity prices, supply chain disruptions, higher taxes and fuel prices, and pent-up demand once the pandemic situation improves. Therefore, the RBI may not cut rates further in the near future, but rather adopt a wait-and-watch approach and monitor the evolving macroeconomic situation closely.
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