Decoding Disinflation and its Impact on Indian Economy

Disinflation refers to a scenario where the rate of inflation is decreasing or the price growth rate slows down even though inflation still exists. It indicates that the rate at which prices increase is falling even if prices largely remain high.

• In disinflation, demand pulls back, reducing upward price pressures even as inflation persists above comfortable levels.
• It is different from deflation, where actual price levels start declining due to demand recession.

India’s Experience with Disinflation

After over three years of high inflation post the COVID pandemic, recent trends signal disinflation in India:

• Retail inflation peaked to 7.79% in April 2022 but has been steadily cooling to 5.72% in December 2022 and further down to 5% in January 2023.
• While overall prices remain high, the rate at which costs were increasing has slowed down for over six months now.
• Early 2023 price data backs further softening with food and fuel inflation majorly down.

Key Highlights of India’s Disinflation

• The disinflation is being driven by easing global supply shortages and commodity prices with economic activity slowing down.
• Further, the Reserve Bank of India (RBI) has actively contained demand by increasing interest rates to squeeze excess liquidity.
• Cooling vegetable, cereal and oil prices have provided relief from record high food inflation as supply conditions normalized.
• Base effect also contributing as a high inflation 20 months back mathematically depresses current price growth figures.

Headline Consumer Inflation Trends in India

Assessing Disinflation

These trends have spurred debate on whether it is the start of a virtuous trend or the lull before another storm:

Positive Implications

• Provides relief and stability to households from runaway prices
• Enables central bank to relax monetary tightening supporting growth
• Uplifts business sentiment as input costs cool off
• Solves stagflation risk hovering over economy

Causes for Caution

• Despite slowing, inflation still above RBI’s target band so complacency risky
• Global macroeconomic uncertainties associated with recession keep inflation prone to resurge
• Core inflation excluding food and fuel still sticky due to strong services sector demand in India
• Delayed harvest due to prolonged winter can sharply reverse food inflation trends

Recent Developments

• Retail inflation for January 2023 further eased to hit a two-year low of 5% as per data released on 13th February, 2023.

• This decline was driven by food inflation falling to 4.19% on the back of vegetable prices contracting by over 10% in January along with easing cereal, protein food costs.
• However, economists point that core inflation excluding food and energy was up indicating that demand-pull pressures persist in the economy.

• Cooling vegetable, cereal and oil prices have provided relief from record high food inflation.

• The Finance Ministry in its latest Monthly Economic Review has called the retail inflation slowdown signs of “continued disinflation” highlighting favorable macros.
• However, IMF chief Kristalina Georgieva has termed the current global disinflation as “good disinflation” but cautioned that there are still risks of inflation returning.

Outlook 2023

• RBI’s rate setting panel MPC in its latest meeting on 8th Feb 2023 reduced repo rate by 25 basis points to 6.5% acknowledging falling inflation trajectory.

• The MPC’s stance turned “less hawkish” as it changed stance to “withdrawal of accommodation” from “fighting inflation” indicating inflation concerns have reduced.

Policy Focus Areas

Managing the disinflation to support economy without compromising price stability needs calibrated policy action like:

• Careful monetary stance balancing growth and inflation outlook
• Maintaining supply-side measures on essential commodities beyond seasonal fall
• Channelizing consumption to counter cyclical demand swings
• Promoting agri-production and logistics for food items vulnerable to weather disruption

The current disinflation provides a window of opportunity which policy makers need to leverage while staying vigilant on economic vulnerabilities.

• Disinflation depicts the economy exhibiting early signs of price stabilization as the rate of increase falls though inflation remains high.
• Its optimal management can reset India’s high growth path while avoiding tail-risks.
• Responsible steps to sustain disinflation through fiscal prudence, suitable monetary policy and supply-side improvements form crucial next steps.