India hopes for normal monsoon and hike in interest rates to bring down inflation by year end

A combination of normal rainfalls aiding bumper agriculture output and the Reserve Bank of India (RBI) further hiking interest rates to cut easy money in the system hold key to bringing down multi-year high inflation triggered by surging food and fuel prices, economists said.

Although the government has room to further reduce excise duty on petroleum products to contain inflation from the fiscal side, emphasis will be on monetary policy to control price pressures, they added.

While retail inflation rose 7.04 per cent in May year-on-year, slightly down from 95-month high of 7.79 per cent in April, wholesale or WPI inflation rose to a record high of 15.88 per cent in May. Three-fourths of the price rise is coming from food items and a normal monsoon will help cool it down as it will boost production and replenish stockpiles.

The RBI has already raised interest rates by 90 basis points after inflation remained above its 2-6 per cent target band for a fifth straight month and is expected to hike interest rates by another 80 bps, they said. For the common man, the price hike is drilling a hole in pocket.

Edible oil prices, which had been a major factor contributing to the inflation, have started to ease a bit with leading players announcing some reduction.

India Ratings and Research expects another 50-75 bps hike in the reminder of FY23, he added. Moody’s Analytics expects the benchmark repo rate to be increased by another 60 to 80 basis points in 2022.

In the bi-monthly monetary policy, RBI earlier this month upped the inflation projection for the ongoing fiscal by 100 basis points to 6.7 per cent. Prices of all commodities have increased substantially in the recent past. Right from vegetables, school fee, bus charges to home loans, everything is shooting up.

Taking advantage of the reduction in interest rates, many opted for home loans. During COVID pandemic, interest rates were about 6.5 percent and it has now gone up to 7.3 to 7.5 per cent. This difference in the interest rate is sending the monthly budget of middle-income groups, especially employees haywire.

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