Sticky inflation at elevated levels

by Mahesh Vyas

Retail inflation in January 2023 stood at 6.52 per cent, exceeding the 6 per cent upper tolerance limit set by the Reserve Bank of India. Inflation, recorded by the Consumer Price Index (CPI), rose by 0.8 percentage points this month, after hitting a one year low of 5.72 per cent in December 2022. Inflation has been falling for three consecutive months and was below the upper tolerance limit for two months. A similar trend follows in both urban and rural India.

The rise in inflation is attributed to sticky core inflation and an unexpected rise in food prices. Core inflation, which excludes volatile groups such as food and fuel and light, has been around the 6 to 7 per cent mark since the beginning of the pandemic. While this continues to be the trend this month as well, food inflation has also been an amplifier to the overall rise in retail inflation.

Food inflation was declining from October 2022, due to the seasonal fall in prices of vegetables. However, in January, the food sector, which carries nearly 40 per cent weight in CPI, saw a sharp rise in inflation from 4.19 per cent in December 2022 to 5.94 per cent in January 2023. The increase in food inflation is across all food groups.

Inflation in the price of cereals and products was at a five year high of 16.12 per cent in January 2023. This was a 2.33 percentage points jump in inflation from the month prior. Cereals and products hold the highest weight of 9.67 per cent in the 39.06 per cent that constitutes the food group. Thus, fluctuations in prices of cereals and products tend to have a significant impact on food inflation, which in turn affects overall retail inflation. A rapid rise in prices of cereals and products has been observed since June 2022. From 5.66 per cent in June, inflation in prices of cereals and products increased substantially every month and touched 11.53 per cent in September. Hereon, inflation in this food group continued to touch double digit, record high numbers.

Sharp rises in the prices of cereals and products can broadly be attributed to the reduced supply of wheat and rice in the current fiscal year. This is due to the lack of rains in many states, as well as heat waves. In May 2022, India banned the export of wheat. In September 2022, India banned the export of broken rice and imposed a 20 per cent export duty on non-Basmati rice, barring parboiled rice. When prices continued to be high, the centre announced the sale of 3 million tonnes of wheat in a special Open Market Sale Scheme (OMSS) in January 2023. Despite this, inflation in the prices of cereals and products has continued to rise.

Inflation in the prices of milk and milk products stood at a high 8.79 per cent in January 2023, the highest recorded milk inflation since February 2015. Prices of milk have remained high in the current fiscal year, due to the increase in prices of cattle feed. Fodder inflation, recorded by the Wholesale Price Index (WPI), has been extremely high this year and stood at 29.30 per cent in January 2023. Moreover, large parts of the country saw the spread of lumpy skin disease amongst cattle and other livestock, that affected milk produce.

Vegetable prices, which usually have an overbearing contribution to changes in inflation this time of year, have observed deflationary trends since November 2022. In November, vegetable prices recorded a deflation of 8.08 per cent. Prices declined further which caused deflation to stand at 15.08 per cent in December. However, deflation in this group has eased to 11.70 per cent in January 2023, thus reducing its effect on bringing down inflation.

Prices of meat and fish recorded an inflation of 6.04 per cent in January 2023. Inflation in this group has been rising since September, due to the prevalence of diseases in livestock as well as increasing costs of input such as feed and fodder. Inflation in egg prices increased by 1.87 percentage points to 8.78 per cent this month. A similar reasoning follows. High feed costs and an outbreak of bird flu on the supply side, strong winter demand locally and a sudden rise in exports to Malaysia have been contributing factors to high prices.

Daily commodity prices suggest a fall in the prices of potatoes, onions and tomatoes by a small margin in February 2023. Rice, wheat/atta and milk have seen an overall upward trend in prices. While vegetable prices could bring down inflation in February, the fall may not be large.

For 2022-23, the RBI predicts inflation to be at around 6.5 per cent, after taking into account a likelihood of lower input costs in manufacturing and an average crude oil price of USD 95 per barrel.

In the next fiscal year, RBI forecasts suggest higher domestic prices for cereals and spices due to supply shortages. Milk prices are also likely to be high due to increasing cost of feed. Uncertainty in climatic conditions pose a risk to food prices which will have a considerable effect on overall retail inflation. Nonetheless RBI governor Shaktikanta Das, is confident that challenges in inflation will be less stiff in the next fiscal year and has predicted CPI inflation to be 5.3 per cent for 2023-24.

However, the inflation expectations survey of households released by the RBI suggests that only 2.3 per cent of households expect prices to fall in the next three months and 2.6 per cent expect prices to fall in the next one year. 60.8 per cent of households expect prices to increase more than the current rate in the next three months while 70.8 per cent of households expect prices to increase more than the current rate in the next one year. Higher inflation expectations could drive up actual inflation. This could keep inflation at elevated levels.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.7 +0.8
Consumer Sentiments Index
Base September-December 2015
87.9 +0.2
Consumer Expectations Index
Base September-December 2015
88.0 +0.3
Current Economic Conditions Index
Base September-December 2015
87.8 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Mar 22 Jun 22 Sep 22 Dec 22
New projects 9.01 5.29 4.50 6.84
Completed projects 1.34 1.17 1.39 1.69
Stalled projects 0.43 0.54 0.08 0.01
Revived projects 0.33 0.29 0.16 0.68
Implementation stalled projects 0.09 0.29 0.28 0.11
Updated on: 24 Mar 2023 9:28AM
Quarterly Financials of Listed Companies
(% change) Mar 22 Jun 22 Sep 22 Dec 22
All listed Companies
 Income 20.8 40.1 25.2 16.5
 Expenses 19.8 41.4 26.9 16.3
 Net profit 31.6 21.3 -1.2 6.6
 PAT margin (%) 8.8 7.2 7.6 8.4
 Count of Cos. 4,707 4,749 4,694 4,482
Non-financial Companies
 Income 24.8 50.1 27.8 14.9
 Expenses 25.7 52.9 31.2 15.5
 Net profit 10.1 8.4 -21.4 -8.9
 PAT margin (%) 7.6 5.7 5.5 6.0
 Net fixed assets 2.0 4.1
 Current assets 15.0 19.0
 Current liabilities 11.6 10.4
 Borrowings 3.6 12.4
 Reserves & surplus 11.2 6.8
 Count of Cos. 3,408 3,442 3,425 3,322
Numbers are net of P&E
Updated on: 24 Mar 2023 9:28AM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.6 -1.2 26.5
 Expenses 0.3 -3.5 25.4
 Net profit -2.9 74.2 63.3
 PAT margin (%) 2.1 4.5 6.8
 Assets 8.9 10.7 9.9
 Net worth 4.9 11.8 14.1
 RONW (%) 3.5 7.0 11.3
 Count of Cos. 32,238 31,091 16,811
Non-financial Companies
 Income -1.0 -2.3 30.7
 Expenses -0.8 -4.2 30.3
 Net profit -19.8 62.1 60.8
 PAT margin (%) 2.3 4.1 5.9
 Net fixed assets 11.5 2.5 2.4
 Net worth 2.2 10.4 14.6
 RONW (%) 4.8 7.7 12.4
 Debt / Equity (times) 1.1 1.0 0.8
 Interest cover (times) 1.9 2.5 3.9
 Net working capital cycle (days) 73 82 61
 Count of Cos. 25,483 24,401 13,909
Numbers are net of P&E
Updated on: 19 Mar 2023 11:50AM