What easing retail inflation means for economy

Retail inflation declined to a 25-month low of 4.25% in May, mainly on account of softening prices of food and fuel items. This is the fourth straight month when retail inflation has declined and the third straight month of Consumer Price Index (CPI)-based inflation remaining within the Reserve Bank of India’s (RBI) comfort zone of below 6%.

Breaking down

At 4.25%, retail inflation is the lowest since April 2021 when it was 4.23%. In May 2022, it shot up to 7.04%.
Inflation for the food basket was at 2.91% in May, lower than 3.84% in April. The food basket accounts for nearly half of the CPI. Inflation in fuel and light eased to 4.64% in May, from 5.52% in April.
The decline in inflation was mainly driven by food items led by ‘oils and fats’ and vegetables where inflation fell by 16% and 8.18 per cent, respectively.
In April, retail inflation was 4.7%.

Relation with repo rate

RBI kept the repo rate unchanged at 6.5% on June 8. The central bank had paused its rate hike cycle at 6.5% since April. Prior to that, RBI had cumulatively hiked the repo rate by 250 basis points since May 2022 in a bid to contain inflation.
Currently, expert opinions are divided. While some believe that RBI would keep the rate unchanged for the rest of this fiscal, others believe it may go for a slight decrease to test the waters.

Link with growth

Repo rate is the interest rate at which the central bank of a country (In India’s case it’s the RBI) lends money to commercial banks. It is a tool to control flow of credit in an economy and, thus, control inflation.
Keeping the repo rate unchanged should ideally translate to demand growing at the current pace and contributing to growth at a steady pace. Easing the repo rate should ideally translate to increased production and demand in the economy and giving a bigger boost to growth.

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