India: What does India’s high retail price inflation mean for consumers and businesses?

The pain of high retail inflation in India may not subside soon. A one-percentage-point drop from its April peak and the cruel rise in prices in advanced economies is no consolation for India. Inflation in India – with a consumer price index of 6.7% in July 2022 – is well above the Reserve Bank of India’s (RBI) upper tolerance level of 6%. More worryingly, economists say high inflation will continue for several months or even a year, dragging down inflation expectations, which could negate RBI’s interventions to bring inflation under control.

DK Srivastava, chief policy adviser at EY India, told ET: “Global supply constraints will continue as there are no signs of a quick resolution to the Russia-Ukraine war. Oil prices will remain high. Under this geopolitical scenario, inflation in India could stay at 6% and above until December 2023.”

Deloitte India’s chief economist, Rumki Majumdar, paints a somewhat optimistic scenario. “We expect inflation to fall below 6% in the first half of 2023,” she said, adding that inflation will fall more sharply if China, the world’s second largest economy after the United States, slows further. quickly than expected. RBI also forecasted India’s inflation to fall below 6% by the first quarter of FY24.

Majumdar has another concern – generally, if inflation stays high for a long time, it fuels expectations. “That (the inflation expectation) then pushes up core prices (excluding food and fuel prices, which are very volatile) which often tend to stay flat,” she says.


Inflation expectations are the rate at which people expect prices to rise while making decisions about future economic activities. As they influence household and business investment, expectations have an impact on real inflation. For example, if someone looking to buy a new refrigerator thinks its price might go up in the coming months, they might be tempted to buy it instantly. If more and more consumers behave in the same way and buy things on the assumption that prices will rise in the future, this will fuel demand, thus undoing the central bank’s usual demand reduction tactic as effective tool for mitigating inflation.

RBI’s retail inflation target is 4% with a tolerance band of plus and minus 2% around. This means that inflation below 2% and above 6% cannot be tolerated. For four years before the Covid outbreak, inflation was kept under control effectively, making it a virtual non-issue in economic discourse. Retail inflation averaged below 4% between 2016 and 2020 before breaking through the tolerance threshold in the first year of Covid (6.2% in 2020-21). In no time, inflationary pressure was brought under control, bringing it down to 5.5% in 2021-22.

“Inflation was expected to decline to 4.5% in 2022-23 no later than February 2022. The war in Ukraine has dramatically changed the outlook,” RBI Deputy Governor Michael Debabrata Patra said in a statement. speech delivered in New Delhi on August 24. peaking at 7.8% in April before starting to moderate. In July, inflation stood at 6.7%, compared to 7% in June, mainly due to the easing of food prices.

Meanwhile, the annual inflation rate based on the Wholesale Price Index (WPI) was 13.9% for July, triggered by rising prices for items such as minerals, foodstuffs, petroleum products , base metals, electricity, chemicals, etc. WPI inflation was even higher at 15.18% in June. The Government of India (GoI) expects inflationary pressures to ease “as prices of important raw materials such as iron ore, copper, tin, etc. which fuel the domestic manufacturing process, fell overall in July. 2022”, according to Union Ministry of Finance

July monthly economic report.

The report also highlighted the measures taken by the Indian government to control inflation, such as the release of buffer stocks of rice, pulses and onions, and the imposition

wheat export restrictions. Naturally, the Indian central bank took action.

“The RBI has embarked on an immediate monetary policy response, with a cumulative increase of 140 basis points in the policy rate so far,” Patra said in his speech, reiterating the RBI’s determination to withdraw the accommodations. to contain inflation. For the current fiscal year, the central bank has forecast headline retail price inflation of 6.7%.

EY’s Srivastava estimates that the RBI will raise the policy rate a further 50 basis points, in two tranches of 25 basis points each, by February 2023 to bring inflation back to a tolerable range. Mahindra Group Chief Economist Sachchidanand Shukla takes a different view. He estimates that the RBI will raise the policy rate by 35 to 40 basis points, but all at once.

“RBI needs to load it upstream to have the necessary impact on inflation. In my view, retail inflation will drop below 6% by March 2023,” he says.

He adds that the volatile chart for crude oil – dropping below $100 a barrel before reversing back – will remain the wild card in the pack when prices for edible oils and other food commodities fall, supply chains unclogging.

As high inflation in India and around the world is set to last for several months or even a year or more according to most forecasts, the question arises as to what its impact will be on the Indian economy in general and on India Inc. in particular?

KV Subramanian, former chief economic adviser to the GoI and executive director-designate of the International Monetary Fund (IMF), told ET that high inflation will have more impact on investment than consumption, arguing that Indians are not do not often borrow for food or vacations. . When it comes to investments, debt is invariably a larger component, he says, which is why the fallout will be palpable as borrowing becomes more expensive after the multiple rate hikes by the RBI recently.

“Investments start when interest rates are low,” adds Subramanian.

“But I think India Inc should invest as the impact of the global slowdown in India would be marginal.”

Mahindra Group economist Shukla, citing his own study of 800 non-financial firms for FY21-22, says an uneven K-shaped recovery

was visible to both businesses and consumers.

For example, the top decile of companies surveyed makes up 85% of total profit, while 40% of companies have made no profit in the last eight quarters. Even in the consumer segment, Shukla explains, higher discretionary incomes and positive wealth effects have helped some people engage in revenge consumption while those in the low-income segment have been reeling from high inflation and rising prices. income shocks.

Shukla adds: “Demand at the top of the pyramid remains high as companies sell high-end cars, luxury homes and large televisions too easily. Cars priced above 10 lakh, for example, sell five to seven times faster than those with a lower list price.

It is high time for the RBI to step up its market-based intelligence gathering instead of rolling out old inflation-mitigation measures.

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