Inflation is expected to start softening by July 2022 on the back of diminishing unfavourable base effect, particularly in food articles and liquidity drain as the Reserve Bank of India (RBI) has increased the repo rate by a significant 40bps recently, said the industry body PHD Chamber of Commerce and Industry in a press statement today.
Monetary tightening will have an impact on consumption demand and resultant price corrections in the various goods and services in both consumption and whole sale segments, said Pradeep Multani, President, PHD Chamber of Commerce and Industry
An increase in interest rates by advanced economies will have impact on international commodity prices as cost of inventory carry by speculators will go up and there will be significant price corrections, said the industry body
Recently, RBI increased the policy repo rate by 40 bps to 4.4 percent and also raised the cash reserve ratio by 50 bps to 4.5 percent which will drain Rs 87,000 crores liquidity from the banking system
It is the first-rate hike since 2018 as persistent inflation pressures are becoming more acute, said Multani.
Increase in loan EMIs would impact the consumption sentiments and reduce demand in the economy which would lead to corrections in whole sale prices, he said
A study by PHDCCI on Inflation Expectations stated that the overall WPI inflation showed an upward trend during the last 12 months. The WPI inflation mainly consists of manufactured items which have a weight 64.23 percent, fuel and power with weight of 13.15 percent and primary articles with weight of 22.6 percent.
The WPI inflation stood at 15.1 percent in April 2022 as compared to 10.7 percent in April 2021. The recent rise in WPI inflation is majorly because of the rise in oil and other essential commodity prices on the back of geopolitical distress.
WPI Inflation remains in the double-digit since the last 13 months. CPI Inflation remains above the RBI’s upper band for the fourth consecutive month.
PHDCCI study stated that the annual CPI inflation rate in India accelerated for the continuous seventh month to 7.8 percent in April 2022. Food and Beverages inflation increased to 8.1 percent in April 2022, the highest reading since November 2020, with cost of oils and fats, meat and fish, and vegetables recording the biggest rises. Other upward pressure came from prices of fuel and light, clothing and footwear, housing and pan and tobacco.
Going ahead, in case of CPI, the statistical affect will also start diminishing from the month of October-November 2022 and inflation will continuously soften towards the normal range of RBI upper band.
PHD Chamber suggests a 5-prong strategy to soften the inflation
Possible cut in the state excise duties especially on the petroleum products
Strengthening of the global value chains and shifting of the sources of the imports from higher price to low price countries
Import substitution for the technology intensive and labour-intensive products where India has a high imports category and comprises higher import shares
Enhancing indigenous production possibilities where there is high demand for the commodities
Measures for preventing hoarding of the essential commodities to stop price accelerations.
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