What’s keeping retail inflation above 6%? Here’s the 'culprit'

India's headline inflation, measured in CPI (Consumer Price Index), eased to 6.44% in February 2023 as compared to 6.52% in January 2023. Retail inflation is still above the 6% mark, primarily due to an increase in the cereals CPI, which is the "main culprit" that grew 16.73% in the said month. However, SBI Research in the latest note says the increase in cereals CPI is a "statistical error".

While cereals inflation is seeing an increasing trend for the past two years, the recent increase is "perplexing", says the note. "...the difference between the weighted contribution of cereals CPI and calculated cereals CPI (sum of item-wise) is so large (18 bps in Jan and Feb). The average difference between Jan’15 to Dec’22 is merely 3 bps. This is an unexplained behaviour exhibited in cereals inflation," writes Soumya Kanti Ghosh, group chief economic adviser, SBI.

Another item that is also "perplexing" is milk inflation, says the report. Milk inflation increased to an 8-year high of 9.65% in February 2023. "The NSO methodology is faulty in calculating inflation regarding milk and milk products. A large quantity of such products is used by the commercial establishments for making sweets, tea, coffee, etc., which is included in the CSO estimates of private consumption of milk but is excluded from the NSS estimates."

The report highlights that MSMEs, so far, have shown "remarkable resilience" in financial health even after the policy rate has increased by 250 bps since April 2022.

Why does the rate hike demand rethink now? The SBI report says with the rise of 250 bps in repo rate from April 2022, the incremental housing loans of ASCBs have increased by over ₹1.8 lakh crore in Apr’22-Jan’23 compared to ₹1.4 lakh crore during the same period last year. “Segment-wise, on an average, the proportion of home loans up to ₹30 lakh in total loans disbursed declined to 45% during Jan-Feb’23 from around 60% of the total disbursals in Jun’22 quarter.”

"(For) above ₹50 lakh loan, the share increased from 15% to 25% of the fresh housing loans during this fiscal. This indicates the demand for housing loans by people at the lower end of the strata, who take loans for the affordable housing sector, has been noticeably hit."

Moreover, the rapid increase in EBLR (External Benchmark based Lending Rate) has resulted in banks either increasing the loan tenure or increasing EMI or both depending on the age of the borrower, the original tenure of the loan as also the residual tenure of the loan, the data shows.

What's next? The report says the "contagion has hit the underbelly of the Fed", with the latest CME-Fed Watch (a gauge for market participants to meter the market's expectation of potential changes to the fed funds target rate) showing 41% of the respondents not expecting any rate hike in Fed’s next meet on 21-22 March, while 59% of respondents expect a hike of not more than 25 bps. "While the fall of SVB has been compared to that of Lehman Brothers, there are some notable differences in 2023. The current crisis has originated in deposit-taking banks unlike the investment banks in 2008 which depend on wholesale funding. Further, the global presence of SVB is no match by that of marquee Wall Street Banks."