Inflation Targeting Current Affairs - 2020

RBI: CPI Inflation to ease from 4.8% to 4.4% in Q2

On April 9, 2020, the Reserve Bank of India projected that the consumer Price Index is to ease from 4.8% in Q1 to 4.4% in Q2 of the financial year 2020-21.

Highlights

The estimated easing of CPI implies that the aggregate demand will weaken further. RBI had reduced repo rate and cash reserve ratios during the Monetary Policy Review held in March.

The RBI further estimates that the CPI is to reduce to 2.7% in Q2 and 2.4% in Q4. With the demand weakening, RBI had injected 50 billion USD of liquidity to the banks to support the economy.

Inflation

Currently, RBI is following target inflation rate in the country. The inflation target has been set at 4% with +2% and -2% as target bands on either sides. This means that RBI will try to maintain the inflation rate between 2% and 6%.

The Inflation Targeting was adopted by GoI in 2015.

Consumer Price Index

The Consumer Price Index is weighted average of prices of consumer goods and services such as food, transportation and medical care. It is calculated by taking price changes of every item in the basket and averaging them.

Retail Inflation at 5-year high of 7.35% in December, 2019

According to the data released by Ministry of Statistics and Programme Implementation on January 13, 2020, the food inflation increased to 14.12% in December 2019 as compared to 10.01% in November 2019. The CPI (consumer Price Index) rose to 7.35% as compared to 5.54% the previous month. The inflation was increase was mainly due to vegetables

Highlights

In December 2018, the food inflation was -2.65%. Vegetable inflation in urban areas touched 75% and at the country sides it was at 53%. Onion inflation doubled as compared to the previous month. It was 128% in November and it increased to 328% in December.

Analysis

The soaring crude oil prices due to the increasing tensions between Iran and US is the major reason. In the coming Budget, GoI is expected to increase its spending largely on infrastructure and cut taxes. This might stoke inflation further.

RBI

For the first time, the inflation has breached RBI’s target inflation of 4% (±2%). Predicting the situation, RBI had kept its policy interest rates on hold in its policy review of December 2019.

Implications

As inflation increases, the following can be expected

  • Increase in interest rates that will increase cost of borrowing
  • Slow-down in investment and economic growth