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Factors affecting present inflation level in India

Synopsis: The recent January 2021 retail inflation data provides relief to monetary authorities. Consumer Price Index (CPI) stood at 4.06% which is a desired outcome for ensuring macroeconomic stability. 

Background:

  • The inflation had remained above the RBI’s threshold mark of 6% for six months till November. The ideal range of CPI is 2-6%.
  • In January 2021, inflation reached a 16-month low.
  • The fall in the inflation rate was particularly attributed to a modest rise of 1.89% in Consumer Food Price Index. This was majorly a result of 15.48% drop in vegetable prices and easing of cereal prices.

RBI’s view over inflation:

  • As per RBI, bumper Kharif crops, good vegetable supply in winters, and better prospects of rabi produce could reduce inflation in future months.
  • Further, rising fears of avian flu will decrease poultry demand and control inflation.
  • However, RBI is cautious of higher inflation in pulses and edible oils. A 13.4% price rise was seen in pulses and products. Further, the rise in the oils and fats category was 19.7%.

Future concerns which may cause inflation to rise:

  • First, inflation for eggs and meat was in double digits despite the avian flu threat.
  • Second, the favorable base effect is about to decrease. It is causing fear of rising inflation in the future. The base effect is the fluctuation in a monthly inflation figure due to law or high base i.e. level of inflation in the same month a year-ago.
  • Third, the producers in multiple sectors (automobile, real estate, etc.) are expected to transfer the cost of inputs to consumers. This is due to rising input costs as shown by IHS Markit India Manufacturing Purchasing Managers’ Index (PMI).
  • Fourth, the rising fuel prices could also contribute to increasing inflation. Diesel has already crossed the 80 rupees mark which has pushed prices of numerous goods.

In the current scenario, banks are given necessary support which has enhanced their liquidity. This calls for due vigilance by policymakers, else inflation can’t be moderated thereby impacting macroeconomic stability.

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