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In the month of March 2022, the retail inflation in India touched 6.95%, a 17-month high, the previous high being 7.6% when the first covid lockdown was in effect, 0.9% higher than the inflation rate in February 2022. This is the third consecutive month when the inflation rate has stayed over 6%.
The Consumer Price Index touched 167 points as food inflation shot up to 7.68%. Inflation in India has seen a long range of movement since inflation touched a peak of over 12% in 2012. It also fell and touched its lowest level in late 2017 when it fell below 2%.
The inflation rate in vegetables was 11.64%, in meat and fish was 9.63%, and in oils and fats, was a whopping 18.79%. Prices of petrol and diesel have reached the sky as the price of petrol is above Rs 100 per liter in almost all states and diesel is nearing Rs 100 per liter.
The Reserve Bank of India has projected the inflation rate at 5.7% for the current fiscal year, significantly higher than the previous estimate of 4.5%.
What is causing Inflation in India?
Sharp rises in fuel costs were one of the most important factors to inflation before the Russia-Ukraine war. After the war began, fuel and wheat saw a sharp rise in prices as the global supply of fuel was heavily affected. Wheat prices rose globally as Indian exporters chose to make higher profits and increased their wheat exports, resulting in retail inflation.
Furthermore, Input costs have been rising consistently in most sectors. Consequently, automobile sales have been severely hit due to a rise in input prices and a lack of semiconductors to complete production. FMCG companies are facing a significant hike in prices which they are shifting onto customers, thereby resulting in household inflation.
What can RBI do to control retail inflation?
Consistently higher inflation rates tend to be harmful to an economy as it leads to confusion in the economy, lower investment in capital markets, higher pressure on the lower-income groups, menu costs, lower international competitiveness, and reduced value of savings among several other effects.
The Monetary Policy Committee (MPC) of the RBI is responsible for drafting monetary policies and reviewing their performance. They are required to keep the inflation within the price band of 2-6%. Three consecutive breaches warrant the panel to explain to the Parliament their reason for failure to maintain the rate.
One of the most used monetary tools to tackle inflation is the interest rate. When inflation rates go beyond an acceptable level, the Central Bank of a country increases the interest rate to incentivize savings. Since saving money becomes more profitable, people tend to spend less and save more, thereby withdrawing money from the economy. Due to a lack of money circulating in the economy i.e. less money to buy the high-priced products, the market, and inflation rate moderate to acceptable levels.
State Bank of India, ICICI Bank, and HDFC Bank, the three most systemically important banks in India, provide interest in the range of 2.5-3.5%. Such low rates of interest tend to discourage people from saving money. People choose to spend money instead. Therefore, a rate hike seems to be imminent in the near future.
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By Aman Agarwal
This news piece is brought to you in association with jobaaj.com
