+91-8595390705

Inflation under 6%

14 Dec 2022 Inflation under 6%

Posted at 05:49h in Daily current-affairs by
0 Likes

Significance for Prelims: Concept of retail and wholesale inflation

Significance for Mains: Impact of high and low inflation and RBI’s stand.

News: November retail inflation has fallen below the upper limit of the RBI’s extended comfort zone, i.e. 6%. Ministry of Statistics and Programme Implementation’s (MoSPI) data on retail inflation for November stood at 5.88%. Over the past two months, the inflation rate has significantly decreased from 7.41% in September to 6.77% in October to under 6%.

About CPI-based inflation or retail inflation:

  • It measures the price level a retail consumer faces against wholesale inflation.
  • Wholesale inflation is measured using the Wholesale Price Index (WPI), while retail inflation is measured using the Consumer Price Index (CPI). 

Significance of recent inflation data:

  • Since the start of the 2022 year, November is the first month when the retail inflation rate has fallen below the 6% mark, and the 6% mark is the highest level of the RBI’s comfort zone. 
  • Throughout 2022, retail inflation has been above 6% 2022, leading to an explanation by RBI  under Section 45ZA of the RBI Act, 1934 RBI  to the government and Parliament why it failed to contain retail inflation.

Reasons for sharp deceleration in inflation rate:

  • Sharp slowdown of food inflation in November: In September, consumer food price inflation grew at 8.6%, then decelerated to 7% in October and just 4.67% in November.

Geographical distribution of inflation in India: The national average was 5.88%

  • States with the highest inflation rate were Telangana (7.89%), Andhra Pradesh (6.9%), and Haryana (6.81%).
  • States with the lowest inflation rate were Delhi (2.17%), Himachal Pradesh (3.22%), and Chhattisgarh (3.5%).

Inference from inflation data: It indicates that compared to November of last year(2021), the overall price level increased by 5.88%.

  • There is a moderation of high retail inflation, but it is still uncomfortably high. In April, inflation hit an eight-year high of 7.8%. 
  • Inflation is likely to stay high for a few more months. According to a recent research note by Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, “CPI inflation remains around 6% till February 2023; then it dipped to 5% in March and to around 4.5% in the first quarter of 2023-24 financial year, or the April to June quarter of 2024. 
  • Rapid fluctuation in food and fuel prices: Now, everything from clothes to houses is costlier, not just food and fuel prices. Core inflation rose further in November. 

Action taken by RBI: RBI may continue with its hawkish stance for some time as high core inflation takes a long time to moderate. 

  • RBI has raised interest rates by 225 basis points to contain fast-rising inflation since May.
  • Moderation in headline inflation is mostly due to softening in food inflation and, to some extent slowing down economic activity, also responsible for higher interest rates. 
  • In its recent monetary policy, RBI was concerned about high core inflation.
  • High-core inflation has seeped through the broader economy, and it has stayed at and around the 6% mark throughout the year. 
Monetary Policy:

  • Primary objective of MPC: Maintaining price stability for sustainable growth.
  • The RBI Act was amended in May 2016, allowing the central bank to operate the country’s monetary policy framework. According to the RBI website MPC framework “aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation, and modulation of liquidity conditions to anchor money market rates at or around the repo rate. “Repo rate changes transmit through the money market to the entire financial system, which, in turn, influences aggregate demand – a key determinant of inflation and growth.”

Monetary Policy Committee constituted under section 45ZB of the amended RBI Act,1934:

  • Central government will constitute a six-member Monetary Policy Committee (MPC).
  • MPC will determine the policy interest rate required to achieve the inflation target.
  • First MPC under the amended RBI Act was constituted on September 29, 2016.
  • Monetary Policy Committee’s decision shall be binding on the Bank.
  • Through an amendment in the RBI Act, of 1934 the policymakers embraced the idea of central bank “independence with accountability”. 
  • Central government, in consultation with the Reserve Bank of India (RBI), will set an inflation target based on the consumer price index (CPI) once every five years. 
  • RBI was independent in conducting its monetary policy the way it wanted, but it will be held accountable if it fails to meet inflation targets.
  • The central bank will freely set up interest rates through the monetary policy framework to achieve low and stable inflation without government interference or electoral pressure.
  • Under section 45ZA of the RBI Act,1934, the centre, in consultation with RBI, has fixed the CPI inflation target at 4% with an “upper tolerance limit” of 6%.
  • Suppose RBI fails to achieve its inflation target for three consecutive quarters. In that case, it has to submit a report to the centre stating reasons for its failure to achieve the inflation target and possible remedial measures to be taken by the bank.

Members of MPC:

  • RBI Governor as ex officio chairperson of MPC.
  • Deputy Governor in charge of monetary policy. 
  • An officer of the Bank to be nominated by the Central Board.
  • Three “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy” to be appointed by the central government.

Core inflation: Inflation rate without the food and fuel prices.

Further reading:

  1. Headline Inflation
  2. Monetary Policy Committe.

Q. With reference to the Indian economy, consider the following statements:

  1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
  2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
  3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given above are correct? 

(a) 1 and 2 only 

(b) 2 and 3 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

Mains:

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.

Source: The Indian Express

Article: Inflation under 6%, but here’s why RBI may not moderate hawkish stand yet

Article Link: https://indianexpress.com/article/explained/inflation-under-6-but-heres-why-rbi-may-not-moderate-hawkish-stand-yet-8320723/ 

No Comments

Post A Comment