Higher liquidity in the system has impeded the transmission of policy rates and interest rates continued to remain relatively low.
After rising beyond the Reserve Bank of India’s comfort level for three months, retail inflation has again softened to 5.02 per cent in September on the account of fall in vegetables and fuel prices.
According to the data released by the National Statistical Office (NSO), the inflation in food items declined from 9.94 per cent in August to 6.56 per cent in September, cooling down the overall headline inflation.
Another factor that could have contributed to the lower inflation was the base effect. The inflation in September last year stood at 7.41 per cent — the second highest in the entire 2022 — which resulted in retail inflation declining steeply to 5.02 per cent.
The Central bank aims to keep the retail inflation between two per cent and six per cent. If inflation hovers in this range, it will give RBI freedom to pursue pro-growth measures.
The RBI, however, is unlikely to ease interest rates to push economic growth in spite of inflation declining to the RBI’s comfort level because the geopolitical situation, which determines crude oil price, still remains volatile.
The outlook of food inflation continues to remain uncertain in the wake of subdued monsoon and fears of El Nino affecting rabi crops. The inflation in pulses and cereals — the two important products of everyday use — still remains elevated at 16.38 per cent and 10.95 per cent, respectively, in September.
Higher liquidity in the system, according to RBI, has impeded the transmission of policy rates and interest rates continued to remain relatively low.
The election spending in five states and public expenditure in the run-up to the Lok Sabha elections in the next six months would keep consumption demand high; as such it will leave no scope for the Central bank to step in to reduce interest rates to support economic growth by boosting consumption.