Inflation on the Rise...

Wed, 20 Jul Pre-Open

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The data pertaining to inflation for the month of June suggests that the retail inflation is on the rise. Retail inflation for June 2016 came in at 5.77%. This was marginally higher than the 5.76% that were reported in May 2016. While, there was no dramatic increase in the inflation numbers, it continued to remain high.

The rising retail inflation is mainly on account of increasing fuel and food prices. The price of the Indian basket for crude oil has now gone up by more than 71% between February and June. Earlier, lower crude prices helped keep lid on the inflation levels. In fact, the government had increased their excise duty rate during this period and did not effectively pass the entire drop in the fuel prices to consumers. Doing this, the government earned additional revenue. However, in the present scenario, the surge in the crude oil prices would have an adverse effect on inflation levels unless the government takes effective measures.

Rising oil prices also leads to an increase in the prices of the food items because of the logistics cost involved in delivering food till the last mile. The country has seen a major dip in its water reservoir levels which has affected the sowing of crops and might result in lower production and higher prices of food items.

The government cannot control oil prices; it can partially keep a check on food inflation. The government's discipline on minimum support prices coupled with maintaining proper demand supply balance in terms of food products will ensure that the prices do not increase further.

While, the government has done a good job in balancing the demand supply balance for cereals, the same does not hold true for pulses. It has left a lot to be desired on the pulses front. The government needs to fix these structural impediments to ensure low and stable inflation in the medium-long term.

Further, normal rainfall as predicted by the Indian Meteorological Department (IMD) will help keep the inflation numbers in check. However, in the case of an inadequate rainfall, there may even be a case wherein the RBI would have to raise interest rates since inflation would rise.

While, RBI wants to bring down the inflation number at around 4% by the first quarter of fiscal year 2018, Rising oil and food prices continue to pose a strong challenge in achieving this target.

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