Transmission of declining wholesale inflation in retail figures expected soon: Finance ministry report

New Delhi [India], March 20 : The consistent moderation in wholesale inflation in India, which fell to a 25-month low in February, is expected to get reflected in the retail inflation soon, according to Monthly Economic Review February 2023 of the Department of Economic Affairs.
Falling international commodity prices and government measures have aided in easing inflationary pressures in February, the report said on Monday.
"With WPI inflation declining to a 25-month low, its transmission to CPI inflation is soon expected. Household inflation expectations remained anchored, as seen in the January 2023 round of RBI's Households' Inflation Expectations Survey," it said.
However, it said a slight uptick in business inflation expectation, as surveyed by IIM Ahmedabad, is observed in Q4 of 2022-23, though it remains lower than in the first two quarters of the current year.
Notably, wholesale inflation in India based on the Wholesale Price Index continued to moderate and was at 3.85 per cent (provisional) in February 2023, against the previous month's 4.73 per cent. Overall wholesale inflation was at 8.39 in October and has been falling since then. Notably, the wholesale price index (WPI)-based inflation had been in double digits for 18 months in a row till September.
Meanwhile, retail inflation in India fell marginally but remained above RBI's 6 per cent upper tolerance band for the second straight month in February 2023, with the Consumer Price Index pegged at 6.44 per cent. In January, the retail inflation was 6.52 per cent.
India's retail inflation was above RBI's 6 per cent target for three consecutive quarters and had managed to fall back to the RBI's comfort zone only in November 2022.
Under the flexible inflation targeting framework, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.
Since May last year, the RBI has increased the short-term lending rate by 250 basis points, including the latest 25 bps hike, to tame inflation. Raising repo rate helps in cooling demand in the economy and thus helps in managing inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
"Going forward, the inflation trajectory will likely be determined by extreme weather conditions like heatwaves and the possibility of an El Nino year, volatility in international commodity prices and pass-through of input costs to output prices," the government's monthly report said.
Further, quoting forecasts of various international agencies, the monthly review said inflation in India will moderate in 2023-24 compared to 2022-23 and is likely to remain in the range of 5.0-6.0 per cent, "with risks evenly balanced".
The monthly review also noted the Russia-Ukraine conflict and tightening of monetary policy have again brought the issue of corporate debt vulnerabilities to the fore.
"This is after the Covid-19 pandemic had directly impacted the balance sheets of the corporate sector globally, which were already highly leveraged. With back-to-back shocks, the risk of a spill over of the stressed balance sheets of the corporates to the balance sheets of financial institutions has risen."
Analysis, however, according to the report, revealed that India is one of the few countries that have a lower corporate debt as a percentage of the GDP in Q3 of 2022 as compared to the corresponding quarter of crisis-hit 2008.
"Macroeconomic stability is likely to receive a further boost in FY23 as the current account deficit is set to narrow from the year-beginning estimates. The jump in net service exports over the previous year is a critical development as India increases its market share in both IT and non-IT services, whose demand has been triggered by the pandemic."
It added imports are also less costly now with the easing of global commodity prices.
"With a manageable current account deficit and a growth rate highest among the major economies in FY23, the Indian economy has shown a new-found resilience in sailing through the turbulence caused by the pandemic and geopolitical stress," the review report said.