Retail Inflation – March 2020 and Annual FY 20

15 April 2020

Retail headline inflation in March 2020 fell to a 4-month low of 5.9%, 0.7% lower from a month ago and 3.1% higher from corresponding month a year ago. Inflation for the month has been notably lower than CARE Ratings’ estimate of 6.5%. It is to be noted that on account of the nationwide lockdown following the spread of COVID-19, fieldwork for price collections had to be suspended and 66% of the price quotations were received while the price behaviour of the remaining price quotations were established based on internationally accepted methodologies.

The moderation in inflation during the month on a sequential basis (mo-m) can be ascribed to significant fall in the inflation in the food basket, which accounts for the highest share in the CPI index. Within the food basket, the notable decline in case of vegetable inflation has led to the overall moderation.

Retail inflation has averaged 4.8% during the fiscal FY20 , 1.3% higher than a year ago. Inflation during the first half of the fiscal stood at 3.3% and has seen a perceptible spike in the second half with an average growth of 6.3%. Retail inflation of 4.8% during the fiscal can be largely attributed to significant rise in food prices with notable increase seen in case of vegetables, pulses, oils and elevated inflation seen in proteinbased items like milk, meat and fish. The unfavourable base effect in H2-FY19 also drove inflation higher in H2-FY20. Core inflation (headline inflation less food and fuel) has remained benign during the year while fuel inflation has been volatile ranging between -2.2% and 6.6%

During the fiscal, headline inflation has breached the upper-limit of the RBI’s inflation target (6%) for 3 months during Dec’19-Feb’20. Even in March’20, headline inflation has been marginally lower than the 6% target. Despite this, the RBI has slashed the policy repo rate by 185 bps from 6.25% in March’19 to 4.4% as of March’20 highlighting lingering concerns to the growth outlook amidst COVID-19 pandemic and projected easing inflationary concerns.

The gap between rural and urban inflation which was wide at more than 2% during the first 5 months of the fiscal has narrowed considerably and in the previous 3 months, it has been noted that rural areas have recorded high inflation vis-à-vis urban areas

Exhibit 1: CPI inflation (y-o-y %)

Monthly movement– March’2020

Food inflation in March 2020 grew at 7.8% as against 0.7% in the corresponding month a year ago and 9.5% in February’20. The moderation in prices from a month ago can be ascribed to decline in inflation in case of vegetable commodities (from 32% in February’20 to 18.6% in March’20) and eggs (from 7.3% in Feb’20 to 5.6% in March’20).

Inflation in pan, tobacco grew to 7-month high of 4.7%, 0.6% higher than a month ago. Inflation in clothing and footwear rose to a 1-year high of 2.1% in March’20, 10 bps higher than a month ago.

Inflation in housing remained stable at 4.2% from a month ago. However, it was 70 bps lower than that in March 2019.

The inflation in the fuel and light rose to 16 month high to 6.6% in March 2020 as against the 2.3% growth seen in March 2019. The inflation in this component has seen a sustained increase in the last 4 months on the back of rise in LPG prices and increase in taxes on petrol and diesel off-setting the fall in international crude oil prices.

Miscellaneous items inflation moderated to 4.4%, 10 bps lower than 4.5% a month ago and 130 bps lower than that in March 2019 (5.7%). The moderation was on account of a broad-based fall in inflation from a month ago on all miscellaneous commodities except personal care. Inflation in personal care products at 8.85% has risen to a more than 7 year high.

Annual trend – FY20

Food inflation during the year averaged 6.1% during FY20 as against 0.7% a year ago. Most of this upsurge was propelled by spike in vegetable prices owing to unseasonal rainfall (in Nov and Dec’19). However, in H2-FY20, there has been broad-based pricing pressure across commodities like pulses, meat and fish, eggs, cereals and milk. The delayed seasonal easing in vegetable prices has led to moderation in food inflation in Q4-FY20.

Inflation in fuel components remained in deflation during July’19 to Nov’19 but has registered perceptible growth during Jan-Mar’20. Low base effect coupled with increase in the prices of LPG and elevated petrol and diesel prices (despite fall in crude oil prices to record low levels) led to price pressure in the fuel basket in the Q4-FY20.

Inflation in the miscellaneous component declined from 5.1% in April’19 to 3.5% in Oct’19 but has seen a marginal pickup in Q4-FY20. This increase in Q4-FY20 has been on account of pricing pressures seen in case of transportation and communication and personal care products.


Table 1: Key components of Consumer Price Index (y-o-y growth %)

Core Inflation

Exhibit 2: Core inflation (y-o-y%)

 Core inflation in March’20 remained stable at 4.1% just like a month ago but lower than 5% registered in corresponding month a year ago.

 Core inflation has remained benign and has averaged 4% during FY20 with a range of 3.5% to 4.5% during the fiscal. Core inflation declined from 4.5% in April’19 to 3.5% in November’19 largely on account of decline in inflation in the education and health segment. A marginal uptick was seen in DecJan’20 and can be ascribed to pick-up in mobile telephone charges (following increase in tariffs of major private players), bus fares and administered railway fares which pushed up inflation in transport and communication segment.

Rural and Urban Inflation

In March 2020, the rural inflation is estimated at 6.1%, 60 bps lower than a month ago while urban inflation stood at 5.7%, 90 bps lower than a month ago. The moderation in inflation in both the rural and urban areas from a month ago has been has been on account of falling food inflation. The fall in food inflation (m-o-m) in urban areas has been sharper than the fall in food inflation in the rural areas.

Rural inflation during the year averaged 4.3% while urban inflation stood at 5.4%. Inflation in both rural and urban areas in FY20 was higher than a year ago. The gap between rural and urban inflation during FY20 has narrowed considerably. Rural inflation was higher than urban inflation during April-Dec’19 but has seen a significant increase since December’19 which has led to inflation in rural areas being higher than urban areas. This sudden spike in rural inflation has been on notable increase in rural food inflation which has risen from -0.4% in April’19 and below 1% growth till Aug’19 to double digit growth of more than 11% in Dec-Jan’20.

State-wise inflation

Exhibit 3: State-wise Inflation (y-o-y%)

Movement in RBI’s Policy and retail inflation

Exhibit 4 : Movement in inflation and RBI policy rates

During FY20, the RBI reduced policy repo rate by 1.85% from 6.25% in March’19 to 4.4% in March’20.

The RBI slashed policy repo rates by 1.1% during March’19 to October’19 on slowdown concerns in the domestic economy and with retail inflation remaining lower than its median inflation target of 4%

The RBI slashed policy repo rates by 1.1% during March’19 to October’19 on slowdown concerns in the domestic economy and with retail inflation remaining lower than its median inflation target of 4%

Despite persisting inflationary concerns, the repo rate was slashed by 75 bps in March’20 on the back of the novel coronavirus pandemic and its likely adverse impact on the domestic impact. The RBI has projected moderation in food inflation and benign core inflation.

CARE Ratings’ View

We expect the retail headline inflation to remain at elevated levels in the coming few months with likely higher food inflation owing to the extension of the nation-wide lockdown till 30th April which could adversely impact the food supply chains. Despite international crude oil prices remaining at benign levels, the taxes on petrol and diesel commodities could keep the prices of the commodities at elevated levels. Fuel inflation could be higher also on account of a low base effect. However, core inflation would remain benign in the months ahead


Madan Sabnavis, Chief Economist

Sushant Hede, Associate Economist


Rachna Gupta, Manager – Training


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