Wednesday, 09 Oct, 2024
By: Anshul Vipat
Image source: IANS
The fall in retail inflation indicates that the steps taken by Reserve Bank of India (RBI) to control the rising inflation in the country have delivered success
In India, the rate of inflation, measured whether by wholesale price index (WPI) or consumer price index (CPI), has declined recently. WPI rose at above 10 percent for 18 months, peaked in May 2022 at 16.63 percent and came down to 8.39 percent in October 2022. CPI inflation was at above 6 percent (above RBI’s acceptable band) for 10 months and declined to 5.66 percent in December 2022.
The fall in retail inflation indicates that the steps taken by Reserve Bank of India (RBI) to control the rising inflation in the country have delivered success. The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The retail inflation has come down to its lowest level since December 2021. November has been the first month in the calendar year 2022 which has witnessed the CPI falling below the 6 percent mark.
How RBI managed to tame inflation
The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was increased in December by the Monetary Policy Committee (MPC) by 35 basis points (bps), bringing it to 6.25 percent. The MPC has increased the benchmark interest rate by 225 basis points so far this fiscal year in an effort to control the raging inflation.
The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.
Since April, the central bank has hiked repo rates five time. In early December, it hiked the repo rate by 35 basis points to 6.25 percent. Prior to this, the RBI had raised the repo rate by 50 basis points in September, 50 basis points in August, 50 basis points twice in June and 40 basis points in May.
According to K. Ramasubramanian, retired General Manager, RBI, the huge sale of forex reserves helped maintained exchange rate. There was a huge sale of forex almost Rs 3 lakh crore to maintain the exchange rate.
Fall in international prices
Easing of international prices including crude largely benefited the central bank to control prices. India currently imports 85 percent of its oil demand and the rise in crude oil prices directly increases import bill and expenses. All this leads to inflation, and a depletion of our forex reserves because we’re sending out more dollars on crude oil.
The price of a futures contract for Brent crude oil has dropped over 9% in the last two days, slipping below $78 per barrel for the first time since December 12, 2022. With commodity prices globally coming down, it should support India’s import bill. Further, India is likely to continue buying discounted Russian crude oil.
