Inflation refers to the rising prices of most goods and services of everyday use, such as food, clothing, accommodation, entertainment, transport, and consumer staples. The Wholesale Price Index (WPI) and Consumer Price Index (CPI), often known as retail inflation, are the two main indexes used to calculate inflation in India.
The CPI estimates the difference in the cost of commodities and services such as food, medical care, education, and electronics which Indian customers buy. On the other hand, the WPI records the goods and services that larger enterprises exchange with smaller ones to resell them.
India’s inflation lowered to a five-month low of 6.7 percent last month. The retail inflation likely cooled in July, led by lower food prices, with prices of certain vital items posting a sequential fall. On August 5, RBI’s monetary policy committee increased the repo rate by 50 basis points to 5.4 percent, meaning an increase of 140 basis points in just three months.
What was causing the price rise?
1. Increase in Crude oil prices –
The high inflation rate in March 2022 is primarily due to increased prices of crude oil and natural gas, mineral oils, and primary metals owing to disruption in the global supply chain. In April, the price increase in the fuel and light category of the retail inflation basket accelerated from 7.52 percent to 10.80 percent.
2. Global impact of Russia Ukraine battle –
The Ukraine war and the inflation through higher crude oil prices are essential contributors. The current spike in inflation was due to increasing costs of crude oil and other commodities driven by the Russia-Ukraine war.
3. Increasing prices of household food items –
Retail inflation increased mainly because of the rising prices of essential food items like oils and fats, vegetables, meat, and fish. CPI data indicates that inflation in oils and fats in March skyrocketed to 18.79%. The geopolitical crisis resulting from the Russia-Ukraine war pushed edible oil prices higher.
4. Consequence of Covid-19 –
In 2020-21, when the pandemic hit the economy, food prices rose by an even more significant factor. But until then, fuel price inflation stood low at 1.3% in 2019-20 and 2.7% in 2020-21. In 2021-22, when the global economy started recovering sharply, food price inflation moderated to 4%, fuel prices rose by 11.3%, and core inflation went up to 6%.
Multiple factors have driven this ease in inflation in the past two months.
1. Various steps have been taken by the government, including the cut in taxes on petrol and diesel, restrictions imposed on food exports, and a cut in cement prices amid an aggressive infrastructure push by the government.
2. A global meltdown in commodity prices has helped ease the pressure on retail inflation.
3. The Covid 19 effects are dying slowly and steadily, and the government has taken control measures to minimise the impact of demand-led price fluctuations.
RBI MPCs view on Inflation with plans on another repo rate hike in 2023
The Reserve Bank of India’s MPC (monetary policy committee) increased the repo rate for the third time in the current fiscal year to tame the inflationary pressure, taking the key policy rate to the pre-pandemic levels.
RBI Governor Shaktikanta Das stated that the MPC sees signals that growth will remain robust, and there are early indications that the economic growth is gathering momentum.
Given the global recessionary environment, economists believe that the policy rates in India will peak below 6% in this calendar year. In addition, RBI may also further hike the repo rate by year end and in early FY23.
The present high level of inflation influenced RBI to go for a 50 bps rate hike. Economists estimate that the market is currently factoring in the peak repo rate at 6% in this cycle and expect medium-term inflation to range from 5 to 5.2%.
There are economic indicators of inflation having peaked in India. RBI’s rate hikes have started lowering inflation expectations and will help control the second-round impact of higher commodity prices going ahead. RBI will persist in calibrating its monetary policy to maintain and nurture macroeconomic stability while further easing retail inflation and will remain flexible in its approach.
