Retail Inflation rises to 6.52% in January, what lies ahead??

The Consumer Price Index (CPI) measures the change in the prices of goods and services from the perspective of the consumer. The RBI pays very close attention to this figure in its role of maintaining price stability.

After falling for two months, India’s retail inflation surged dramatically in January to 6.52%, according to the data released on 13th February by the Ministry of Statistics and Programme Implementation. Earlier the retail inflation rate had eased down to 5.72% in December. It was 5.88% in November, and 6.77% in October 2022.

This surge was expected due to an unfavourable base effect from last year. But January’s 6.52% rise on an annual basis as against 5.72% in December last year is much higher than expected. This can be attributed to rising food prices, which account for nearly 40% of the Consumer Price Index (CPI) basket.

Going into the details, on a combined basis, the inflation in cereals and products rose by 16.12%, while for eggs, milk, meat, and fish, it was between 6-9%. However, the inflation declined for vegetables by 11.7%, but spiked for spices by 21.09%.

For food and beverages, the retail inflation rose by 6.19%, while for clothing and footwear the inflations increased by 9.08%. Housing inflation rose by 4.62%, while for fuel and light, the inflation rose by 10.84%. For miscellaneous items, it rose by 6.21%.

Not only India’s problem but a global concern

Higher inflation has been a concern for central banks across the world, including India, as the uncertain nature of the Russia-Ukraine war compounded supply-side disruptions. This also came at a time when the world was barely going through a nascent recovery from economic shocks due to the pandemic over the last two years.

The RBI had cut India’s inflation forecast for this fiscal year as the worst of price pressures were seen to be behind, but Governor Shaktikanta Das had flagged the stickiness of the core inflation to be a matter of concern during its Monetary Policy Committee meeting on February 8.

The overall increase in prices has caused shrinkage in disposable incomes of the households which could impact their purchasing capacity. Lenders may also take an adverse view of the loan repayment capacity of borrowers.

RBI may have no choice but to hike interest rates further

The latest inflation data comes days after the RBI’s Monetary Policy Committee (MPC) increased the policy repo rate by 25 basis points to 6.5%, making it the sixth interest rate hike by the Indian central bank in 10 months.

The sudden spike in the inflation numbers, when the RBI was showing signs of comfort with the inflation trend is likely to have a bearing on the rate action. If the inflation stays elevated for another month or two, it will have a negative impact in the form of another rate hike in April and further liquidity tightening.

For 2023-24, RBI has forecast an average inflation rate of 5.3%, 5% in April-June, 5.4% in both July-September and October-December, and 5.6%in January-March 2024. The RBI’s forecast assumes a price of $95 per barrel for India’s crude oil basket. This is nearly 20 percent higher than current levels.

What will be the effect on stock markets?

Stock markets tend to be more volatile in times of higher inflation. Rising prices of goods and services cause uncertainty in the markets. During periods of rising inflation, companies’ profit and growth margins may be hit, affecting investor confidence which in turn affects their willingness to take on risk in equity investing.

High inflation has historically correlated with lower returns on equities. However, value stocks tend to perform better than growth stocks in high inflation periods, and growth stocks tend to perform better during low inflation.

ABOUT THE AUTHOR

Ketan Sonalkar (SEBI Rgn No INA000011255 )

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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