Normal monsoon, rate cut key to lower inflation by end of year: economists

A combination of normal rainfall supporting bumper crop production and the Reserve Bank of India‘s (RBI) further interest rate hike to reduce easy money in the system are key to reducing the multi-year high inflation triggered by soaring food and fuel prices, economists said.

Although the government has leeway to further reduce excise duties on petroleum products to contain fiscal inflation, the focus will be on monetary policy to control price pressures. they added.

While retail price inflation rose to 7.04% in May year on year, down slightly from the 95-month high of 7.79% in April, wholesale price inflation or WPI has hit a record high of 15.88% in May. Three-quarters of the price rise comes from food and a normal monsoon will help cool it as it boosts production and replenishes stocks.

The RBI has already raised interest rates by 90 basis points after inflation remained above its target range of 2-6% for a fifth consecutive month and is expected to raise interest rates by 80 basis points additional basics, they said.

For the common man, rising prices pierce a hole in his pocket.

Edible oil prices, which had been a major contributor to inflation, began to ease a bit, with major players announcing some reduction.

“Gasoline and diesel have become expensive but, in comparison, taxi fares have not increased much. We also have to pay taxi companies. We have quite a bit of money left,” said Sukhwinder Singh, a 47-year-old taxi driver. .

A 40-year-old vegetable vendor said it has become difficult to manage two meals a day as people opt for door-to-door delivery rather than buying from vegetable vendors. “Drugs are getting expensive. We can’t even afford to get sick these days.”

On June 16, Economic Affairs Secretary Ajay Seth said inflation in India was mainly due to high energy and food prices and hoped it would moderate in the coming months. “We are all aware that the summer months are tough months in terms of vegetables and other items,” he said. “High crude prices are certainly a challenge and all necessary and feasible measures are being taken.”

S&P Global Ratings economist Vishrut Rana said rising global commodity prices are a key driver of inflation and the outlook for food inflation, which weighs heavily in the overall CPI basket , will depend on the monsoon. in prices.

“There are other policy options to deal with broader price pressures, such as cutting excise duties, lowering value added taxes or direct subsidies on agricultural products, but the emphasis will likely be put on monetary policy for now. We expect an additional 75 basis points rate increases this year. Tighter monetary policy will help slow the rise in inflation,” Rana told PTI per E-mail.

India Ratings & Research’s senior economist Sunil Sinha said India being a net importer of commodities could not do much about it. However, to mitigate the impact, reducing import duties and subsidies is the solution. But these have their own limitations and cannot fully offset the impact of imported inflation which, apart from high prices, also seeps into the economy via the depreciation of the rupee.

India Ratings and Research expects a further hike of 50 to 75 basis points in the FY23 callback, it added.

Deloitte India economist Rumki Majumdar said the inflation was more the result of supply chain disruptions, both globally and domestically. Strong sanctions against Russia after the geopolitical crisis, new restrictions on the supply of oil and gas from Russia and recurrent blockages (due to the resurgence of Covid) in a few countries have added to the existing challenges in terms of logistics and supply chain.

EY India’s chief policy adviser, DK Srivastava, said that to ease supply constraints, fiscal policies that affect the real economy and focus on sectors affected by limited supply may prove more effective. But these usually take longer to bear fruit.

“We can expect some improvement in the situation by the third and fourth quarters of 2022-2023,” Srivastava said.

Moody’s Analytics economist Shahana Mukherjee said volatility in global commodity markets is expected to keep inflation above RBI comfort levels heading into the September quarter.

“Wide-spread price increases due to supply disruptions have contributed to the rise in India’s wholesale price index. Moody’s Analytics expects the benchmark repo rate to rise by 60 to 80 basis points. additional bases in 2022.

In the bi-monthly monetary policy, RBI earlier this month raised the inflation projection for the current fiscal year by 100 basis points to 6.7%.

The prices of all commodities have increased significantly in recent years. From vegetables, school fees, bus fares to home loans, everything explodes.

Taking advantage of lower interest rates, many have opted for mortgages. During the COVID pandemic, interest rates were around 6.5% and they have now risen to 7.3-7.5%. This difference in interest rates sends the monthly budget of middle income groups, especially employees, out of whack. Many adjustments have to be made to compensate for the increase in the amount of the mortgage, explains Nageswara Rao, 50, who had taken out a mortgage to buy a house for two BHK.

Private school teacher Farhana Begum, who lives in a rented house, says it’s getting tough given the rising costs of everything. “Everything gets expensive. But wages don’t go up with rising prices. I also take private lessons,” she said.

Arun K Nair, a hospital management expert in Kochi, said: This is going to hit the rural economy very hard soon…Cities could hold their own as wholesalers won’t pass the brunt any time soon.

S Krishna Mohan, Retired Lecturer in Vijayawada: “I feel that the rising cost of transportation due to soaring diesel and gasoline prices has fueled the price hike. Yes, it has become a burden with LPG tariffs which are also increasing.I can say that the impact of inflation is high on basic necessities, which obviously pinches the common people.

(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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