India's Inflation At An All Time High
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Sources: MOSPI Labour Bureau India |
INTRODUCTION
• In April, retail inflation hit a near-eight year high of 7.79 percent, remaining above the Reserve Bank of India's (RBI) inflation goal for the fourth month in a row.
• High prices of petrol and food, particularly vegetables, spices, and oils/fats, as well as home services, contributed to the significant spike in inflation.
• This contributed to the RBI's unplanned repo rate hike of 40 basis points last week.
IMPLICATIONS
• High inflation expectations set off a vicious cycle in the economy, as consumers and small firms hold off on buying and investing for fear of prices rising even further. As demand falls, this has an impact on growth recovery.
• Another problem for the government is to absorb the increased price of edible oil and petrol in the budget by lowering the excise rate. This would also apply to coal imported for power generation.
• Furthermore, as analysts point out, inflation may raise the government's borrowing costs.
WHAT HAS BEEN DONE SO FAR?
• To combat inflation, the RBI hiked the benchmark repo rate by 40 basis points to 4.40 percent in an off-cycle statement
• Agricultural exports are likely to improve rural earnings even more, with YoY growth of 19.9% in April despite logistical hurdles such as high freight costs and container shortages.
• Despite pressure from outflows of Foreign Portfolio Investments, India's forex reserves are at a comfortable $597.7 billion, giving an import cover of nearly 11 months for financing investment and consumption.
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