Inflation hampering the growth of economy, MPC predictions

Everyone’s view of inflation differs based on the kinds of assets they have. For someone who owns real estate or a commodity with a significant price fluctuation, inflation means that their assets’ prices go up. If you have money, you might be affected by inflation because the value of your money will decline.

The rise in retail inflation is likely to put the central bank’s growth priority on hold, leaving it in a wait-and-see position when it meets again. Monetary policy committee (MPC) members predict that though they will not change the policy rate or make an adjustment during the meeting, they will nevertheless raise an alert over rising inflation. According to them, repo rate increases are not expected before 2022, but a reverse repo hike is possible in the fourth quarter of 2019. To ensure that the Indian economy grows and remains healthy, the Reserve Bank of India (RBI) governor Shaktikanta Das has said several times that the central bank will be accommodative as long as necessary.

Inflation was recorded at 6.3 percent in May, above the RBI’s 2 to 6 pc target range. “To put it in technical terms, the MPC is disturbed by this, as they thought core inflation would be temporary. Inflation in this context has now shifted gears, and will likely be around for the foreseeable future,” according to Sameer Narang, chief economist at the Bank of Baroda. This time, inflation in the subcategories is all over the place. Due to this, the prices of key commodities will also rise in June. With core inflation running at this level, it could be difficult to reverse the situation in a hurry, he said.

An economist survey found that the committee is likely to only raise its forecast of inflation to 5.1 percent for fiscal 2022. Furthermore, it is assumed that discussions will also take place about the on-the-road map for exiting the accommodative stance, which likely was delayed by the second COV19 wave. While it is difficult to predict, the effectiveness of a third wave would greatly depend on the pace of co-vid-19 vaccinations, and whether it can cancel out the impact of that third wave.

According to data on CoWIN’s dashboard, India has vaccinated 47.7 million people with two doses of covid-19 vaccines so far. Of course, of course, rising fuel prices is also a major concern. Further, the central bank has expressed concerns about inflation risks in this sector. As with retail gasoline and diesel prices, retail prices of petrol and diesel are dependent on the international price of crude oil, but not on crude oil itself. Gas prices are rising because of global energy prices and high domestic taxes.

A smaller but still significant percentage of the total price of these refinery products is attributable to crude oil, which accounts for about 90% of the total price. Nevertheless, when the MPC is confident that growth will not decline further, it will shift its focus to inflation. RBI recently adopted a strategy to combat rising inflation, saying that the central bank may remain complacent on inflation to a range of 7 to 8 percent, as it is only a temporary phenomenon. Some commentators said that the MPC is waiting for more data before making a determination about how the second wave of economic growth has affected overall growth. However, as the economy opens up to more demand-side pressures, the possibility of further inflation spike is less.

Some core knowledge about the topic:

What is Inlfation?

Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time. The opposite and rare fall in the price index of this basket of items is called ‘deflation’. Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentage.

What are the effects of Inflation?

The purchasing power of a currency unit decreases as the commodities and services get dearer. This also impacts the cost of living in a country. When inflation is high, the cost of living gets higher as well, which ultimately leads to a deceleration in economic growth. A certain level of inflation is required in the economy to ensure that expenditure is promoted and hoarding money through savings is demotivated.

What are the main causes of Inflation?

The main causes of inflation in India have been subject to considerable debates and discussions. These are some of the chief reasons for the increase in prices:

  1. High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
  2. Excess circulation of money leads to inflation as money loses its purchasing power.
  3. With people having more money, they also tend to spend more, which causes increased demand.

Also, note the following pointers:

  1. Spurt in production prices of certain commodities also causes inflation as the price of the final product increases. This is called cost-push inflation.
  2. Increase in the prices of goods and services is also a factor to consider as the involved labour also expects and demands more costs/wages to maintain their cost of living. This spirals to further increase in the prices of goods.

Reference: The Hindu, Mint, ET, FE & BL