Double whammy of rising retail inflation in March and contracting IIP in February

The consumer price index-based inflation rose to 5.52% in March, up from 5.03% in February, figures released by the Ministry of Statistics & Programme Implementation (MoSPI) revealed on April 12. It was at 4.06% in January and 4.59% in December 2020.

In November 2020, the retail inflation figure stood at 6.93%, far higher than the tolerance band followed by the Reserve Bank of India at 4% (+/-2%).

The rise in retail inflation last month is mainly attributed to the rise in prices of food prices with the figure rising from 4.94% in March compared to 3.87% in February.

The weightage of food and food-related items in the basket of goods is 48.24%.

The rise in the overall inflation took the figure close to the 6% level that the Reserve Bank of India maintains as the ceiling for this key parameter.

Significantly, only last week, the RBI monetary policy committee unanimously voted for maintaining an accommodative stance to ensure the money supply needed for growth in the economy. The repo rate was maintained at 4% while the reverse repo rate was maintained at 3.35%. The cash reserve ratio, another variable that determines the liquidity in the system, was also maintained at 4%.

Retail inflation is one of the most important parameters that the RBI considers while framing its monetary policy.

RBI governor Shaktikanta Das announced that growth was of “paramount importance” as the economy struggled to emerge from the impact of the COVID 19 pandemic.

“The surge in CPI inflation to about 5.5% year-on-year in March was not unexpected, Further Uptick in CPI inflation in the coming months cannot be ruled out either given continued supply disruption both in the Indian context as well as global,” said Siddharth Sanyal, chief economist, Bandhan Bank.

Among the food prices which rose month-on-month were oils and fats (24.92% in March), fish and meat (15.09%), non-alcoholic beverages (14.41%), pulses (13.25%), eggs (10.60%). However, the price of vegetables fell 4.83%.

While inflation rose, the industrial output of the country dipped 3.6% in February. In February last year, the output measured by the Index of Industrial Production grew 5.2% in February 2020. The shrinkage of IIP was driven by the manufacturing sector that fell by 3.7% and the mining sector that declined by 5.5%.

According to government data, between April 2020 to February 2021, output in the industrial sector suffered a contraction of 11.3%, It was in contrast to 1% growth in the corresponding period a year earlier.

In February 2020, the manufacturing sector had risen 3.8% and the mining sector output had grown by 9.6%.