Focus: GS-III Indian Economy
Why in news?
India’s retail inflation accelerated to 6.93% in July from 6.23% in the preceding month, dimming chances of further policy rate cuts by the Monetary Policy Committee of the Reserve Bank of India any time soon.
- Data released by the National Statistical Office showed food inflation again picked up in July after decelerating in June – mostly due to localized lockdowns across the country and heavy monsoon rainfall in parts of the country.
- Inflation in rural India remained higher compared to urban India – due to supply disruptions leading to elevated food prices.
- Among states and union territories, Assam faced highest retail inflation while Delhi saw the lowest inflation.
- Inflation increase of some of these commodities at a time of depressed demand is perplexing, which suggests the inflation increase is mainly due to supply disruption not due to demand pressure.
- Also, the government policy of not reducing the price of petrol and diesel has kept the transport costs higher.
How does this pan out for RBI’s decisions?
- While retail inflation continues to exceed the upper range (6%) of the central bank’s tolerance level, the severe economic slump is expected to keep monetary policy accommodative in the foreseeable future.
- RBI’s Survey of Professional Forecasters on Macroeconomic Indicators showed GDP may contract 21.5% in June quarter and 5.8% in FY21.
- Experts suggest that the retail inflation may remain appreciably above 6% in August.
- Monetary policy was already in an accommodative mode before the outbreak of covid, with a cumulative policy rate cut of 135 basis points between February 2019 and the onset of the pandemic.
- While holding the policy rate unchanged, RBI hoped a more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement.
- Households’ one year ahead inflation expectations were lower than their three months ahead expectations in the July 2020 round of the RBI’s survey, indicating their anticipation of lower inflation over the longer horizon.