14 Dec 2022 Inflation under 6%
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:
Monetary Policy Committee constituted under section 45ZB of the amended RBI Act,1934:
Members of MPC:
Core inflation: Inflation rate without the food and fuel prices. |
Further reading:
- Headline Inflation
- Monetary Policy Committe.
Q. With reference to the Indian economy, consider the following statements:
- If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
- If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
- 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/
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