AA Edit | Inflation fall hiding slump?

The Asian Age.

Opinion, Edit

There is some speculation that the Fed Reserve is likely to slash interest rates to boost economic growth.

Food inflation has remained stubborn at 6.61 in October. (PTI Photo)

Consumer Price Index-based retail inflation has declined marginally to 4.87 per cent in October 2023 from 5.01 per cent in September 2023, according to data released by the National Statistical Office. 

As the mandate of the Reserve Bank of India-led Monetary Policy Committee (MPC) was to keep the retail inflation below four per cent, the decline in inflation could sound like music to the ears of policymakers. But if one goes into detail, the situation may not seem so rosy. 

Food inflation has remained stubborn at 6.61 in October, just one basis point (0.01 per cent) lower than 6.62 per cent in September in spite of easing vegetable prices. It indicates that the core inflation, which is retail inflation minus food and energy items, has declined, indicating an easing demand scenario. 

When demand falls, it results in lower economic growth. Traditionally, the central bankers reduce policy rates to induce demand in the economy but the RBI is unlikely to slash rates in the wake of stubborn food prices and continued volatility in global geopolitics. The general election to the Lok Sabha in the next four months would not encourage the government to take any action that could fuel inflation as it affects the poor the most.

While the growth in exports augurs well for the economy, boosting domestic demand is imperative for continued economic growth of the country. Global developments such as the US Federal Reserve’s policy decisions could also have an effect on India. 

There is some speculation that the Fed Reserve is likely to slash interest rates to boost economic growth. While it is good for the rupee as it brings more dollars into India, the infusion of large volumes of rupees to buy out incoming US dollars could increase liquidity and push inflation up. The policymakers, therefore, need to do a fine balancing act to boost demand while not fuelling inflation.

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